By Roger J Kerr
Eight out of 15 economists predict that the RBNZ will cut the OCR interest rate by 0.25% to 2.00% this Thursday, however none of the big four local banks are included in that eight.
The local interest rate markets is still only pricing a 25% probability of a 0.25% cut this week.
The events of last Friday in the US with a “shocker” jobs figure that caused the US dollar value to plummet should make it an easy decision for RBNZ Governor Graeme Wheeler on Thursday to cut the rate.
The current NZD/USD exchange rate are above 0.6900 and the TWI Index near to 74 means that the RBNZ’s revised inflation forecasts will be a lot lower than previously expected.
The RBNZ have been working off an assumed 70 to 68 TWI level. Unless the exchange rate goes down to get inflation higher the RBNZ will be in breach of the 1% to 3% target band for another 12 months. Some flexibility for deviation outside the band is allowed for in the Policy Target Agreement (PTA), however allowing inflation to be constantly below 1% for 24 months is clearly a failure to manage monetary policy appropriately.
The latest bout of US dollar weakness makes it doubly difficult for the RBNZ with a housing bubble to content with as well.
However, unless Mr Wheeler acts decisively with a 0.25% cut, the NZ dollar will appreciate further in the FX markets and inflation will have no chance of getting back within the prescribed band.
It would now be a major surprise if the RBNZ do not cut rates this Thursday.
If the decision is to leave the OCR unchanged, the RBNZ are not following-through on their previous warnings on the currency value and are effectively ignoring the requirements of the PTA.
Mr Wheeler needs to trust that regulatory controls on bank mortgage lending and government/local government initiatives will address the household debt and housing supply issues.
A 0.25% change to interest rates is not going to make much difference to the housing market. The inflation target and the plight of the dairy industry are more important for the RBNZ and the economy than the housing market at this point in time.
The RBNZ slashed interest rates a year ago when international dairy prices plummeted, the financial position of the dairy sector is far more acute today than 12 months ago with now three seasons of incomes below average cost levels.
The RBNZ will be very aware of the financial pressures and stresses in our largest industry and therefore must act accordingly with monetary policy settings.
If the NZD/USD exchange rate was sitting in the 0.6500/0.6600 region today going into Thursday’s Monetary Policy Statement, it was arguably a 50/50 call on whether a 0.25% was justified or not. The fact that the Kiwi dollar has jumped up to 0.6900 on unexpected USD weakness, should now make it a straight forward decision for the RBNZ to cut rates.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com