RBNZ to maintain the OCR at 1.75% - ANZ

Analysts at ANZ expect the RBNZ to maintain the OCR at 1.75% on Thursday and stick to a neutral bias, in what will be Graeme Wheeler’s final OCR decision as RBNZ Governor.

Key Quotes

“We doubt he’ll rattle the cage, with the tone of the accompanying statement, projections and press confidence to reinforce the RBNZ’s cautious, watchful and neutral stance.”

“A case could be made for moving to an easing bias. Core inflation has softened, activity growth is sub-trend, housing market momentum has slowed a lot, a turn in the credit cycle has tightened financial conditions, the NZD has strengthened, and global inflation has rolled over. Local inflation expectation measures will likely be next to soften, driven by falls in headline inflation itself (which to be fair makes somewhat of a mockery of surveyed inflation expectation measures!). Additionally, the RBNZ looks set to lower its near-term growth and inflation forecasts. There is a decent chance that headline inflation will be projected to drop back below 1% again.”

“However, medium-term inflation signals are still positive. The terms of trade have surged, forward-looking indicators such as business and consumer confidence point to growth lifting back above trend, the labour market is tightening, and fiscal policy is set to put more money in people’s pockets. While global inflation is rolling over again, global growth nuances have been more positive, with upside surprises of late in China and Europe. Central banks are becoming more attuned to the risks associated with extraordinarily stimulatory policy, despite inflation targets being missed.” 

“So an easing bias is a leap too far and we think the RBNZ will rely on the flexibility it has within its framework to ebb and flow with recent developments. With each passing day, the impact of secular inflation suppressants is becoming more evident; this is not the time to be a strict inflation target. Whether inflation is 1.5% or 2% is a moot point; it’s still low. Rather, the RBNZ simply deserves plenty of credit for the fact that developments have justified the “aggressively neutral” stance it took back in May.” 

“Overall, it looks like it will be business as usual, with another ultraneutral ‘steady as she goes’ outlook.”

“The market’s focus will be on the tone. While we don’t see an outright easing stance, we expect something on the dovish side of neutral – and more dovish than in May. Language regarding NZD strength could be a little more explicit and the implied hikes within the OCR projections should be removed. To be fair, the May forecasts only had one hike at the end of 2019, but removing it would send a clear signal to a market that still has a full hike priced in by roughly August next year.”

“On the RBNZ’s broader projections, we suspect there will be an element of ‘looking through the noise’. We doubt the RBNZ has changed its views that the “growth outlook remains positive”. So despite the lower starting point, GDP growth will still be projected to lift towards 3½%. Likewise with inflation. The starting point will be lower, and the RBNZ will need to factor in recent NZD strength and oil price weakness, which will delay the return of headline inflation to the target mid-point. However, the forecasts will still show domestic inflation rising gradually in time.”