RBNZ likely to be on hold and retain its easing bias - Westpac

Imre Speizer, Research Analyst at Westpac, expects the Monetary Policy Statement on Thursday to be a close call, but the RBNZ is likely to keep the OCR on hold at 2.25% and retain its easing bias.

Key Quotes

“NZ interest rates and the currency will react moderately higher.

The mix of developments since the March MPS (the RBNZ’s latest forecasts) has been moderately positive overall and argues for waiting until August before delivering the final cut in this easing cycle.

The 90d interest rate forecast is likely to remain at 2.1%, indicating the RBNZ still intends to cut the OCR, with matching guidance language along the lines of April’s “Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data.”.

We assign a 50% probability to this scenario, which could push the 2yr swap rate 7bp higher and NZD/USD 1c higher. Markets would be disappointed because they had priced a 25% chance of cut.

Our second most likely scenario (45%) is of a 25bp cut accompanied by a watered down easing bias and unchanged 90d track. The 2yr swap rate would fall 5bp because a cut was only partially priced, but the 10yr would rise 2bp on suspicion the easing cycle was over. NZD/USD may knee-jerk lower initially, but would then rise as end-cycle suspicions intensified.

For completeness we include extreme dovish and hawkish scenarios, but assign near-zero probabilities to each.”