RBNZ to hold the OCR at 2.0% at Thursday’s OCR Review - Westpac

Imre Speizer, Research Analyst at Westpac, expects the RBNZ to hold the OCR at 2.0% at Thursday’s OCR Review, and to repeat August’s signal that a 25bp cut in November is likely and the NZD will probably fall slightly in response.

Key Quotes

“Developments since August have been more or less balanced for the inflation outlook. GDP and dairy prices have risen more than expected, but the exchange rate is stronger and the housing market has cooled a little. Consequently, we expect Thursday’s onepage statement to deliver the same bottom line as in August: “further policy easing will be required to ensure that future inflation settles near the middle of the target range”.

We assign an 80% chance to such a scenario, which would push swap rates and the NZD moderately lower. Two weeks ago this scenario would have been market neutral but since then swap rates have risen amid a stream of good NZ economic news plus global bond market jitters.

Our dovish scenario would see the RBNZ cutting by 25bp. However this is unlikely (5% chance we think) because the RBNZ has said it prefers to move at Monetary Policy Statements rather than interim meetings. Should the RBNZ surprise by cutting, NZD/USD would fall by 2c and 2yr swap rates would fall by around 20bp.

Our hawkish scenario (a 15% chance) sees the RBNZ watering down its explicit easing bias. It could do this by simply switching the word “will” for “may”: “further policy easing may be required to ensure that future inflation settles near the middle of the target range”. Markets would read this as the RBNZ backtracking, and would price out any further easing. NZD/USD would jump 1c and 2yr swaps would rise 10bp.”