RBNZ likely to cut the OCR by 25bp to 2.0% - Westpac

Imre Speizer, Research Analyst at Westpac, expect the RBNZ to cut the OCR by 25bp to 2.0% at Thursday’s Monetary Policy Statement, and to signal further easing via both the policy paragraph and a 30bp reduction in its interest rate projection.

Key Quotes

“The biggest change of relevance since the previous MPS in June is the elevated exchange rate, the NZD TWI averaging 6.7% above the RBNZ’s forecast for Q3. This, and low inflation, are only partly offset by positive surprises from house prices and GDP, such that the 90-day interest rate projection needs to fall by around 30bp to 1.8% (at the two-year ahead point). That implies two 25bp rate cuts during the next few months - we expect one this week and another in November to1.75% (further details on this here). Textual guidance should reflect such.

We assign a 60% chance to such a scenario, which markets have more than fully priced. Indeed, there may be slight disappointment given August OIS is trading at 1.98% as we write.

To move the NZD significantly lower, the RBNZ would need to lower the interest rate track by around 50bp. In this scenario (a 25% chance we think), NZD/USD would fall by 1c and the 2yr swap rate by around 10bp.

An extremely dovish scenario would see the RBNZ cutting by 50bp. That would push NZD/USD 2c lower, and 2yr swaps around 20bp lower. However we see less than a 10% chance of that. First, since 2001, 50bp moves have only occurred in response to an emergency (GFC, earthquake). Second, a 50bp cut would imply a need to hurry because a sub-1.75% OCR is currently intended, and we don’t believe that’s the case.

Our hawkish scenario (only a 5% chance we think, given the strength of the exchange rate) has the rates track reduced by only 10bp, which could be interpreted as a possible end to the easing cycle. Markets would be disappointed and the NZD would rise 1.5c, 2yr swap rates around 20bp.

Finally, we see around zero chance the RBNZ will remain on hold because its interim economic update clearly signalled its intentions.”