It’s small cuts starting Wednesday or bigger cuts starting at later date
Bank economists usually have a very good idea where the Reserve Bank will set the official cash rate, even if they are often thrown about by its forecasts and tone.
But economists are unsure whether the central bank will cut the OCR from 5.5% on Wednesday, or wait until October, November or even next year.
Anything between a stubborn hold and a 50 basis point rate cut would appear in play, with a “dovish” hold indicating a cut is not far away or a 25bp cut viewed as by far the most likely.
Kiwibank chief economist Jarrod Kerr says the uncertainty has encouraged speculators to take a punt.
Financial markets were yesterday pricing-in about 100bp of cuts by November, which would take the official cash rate from 5.5% to 4.5%, he says.
But that is in part because several overseas hedge funds are actively betting big on rate cuts, trying to force the Reserve Bank’s hand, he says.
“Billions of dollars,” are at stake, Kerr says.
The hedge funds’ thinking may be that the Reserve Bank will be wary of charting a course very different from the one they have mapped out, because of the turmoil that could create in market pricing, he says.
But Kerr suggests they are still taking a big risk.
The Reserve Bank appeared to signal earlier this year that it would wait until it knew inflation was under 3% before kicking off interest rate cuts, which would point to a November rate cut at the earliest.
Infometrics chief forecaster Gareth Kiernan is among those arguing there is no guarantee of an interest-rate cut this year, and if he is right, the hedge funds could take a bath.
But there is no doubt that with headline inflation seemingly “almost there” at 3.3% and fears growing the economy may have slipped back into recession, the pressure for early rate cuts has ratcheted up.
ASB senior economist Kim Mundy, BNZ
“The overwhelming view, as evidenced by market pricing, is that the New Zealand economy is ‘broken’ and that inflation is under control.” BNZ research head Stephen Toplis
research head Stephen Toplis and Capital Economics economist Abhijit Surya are among those tipping – with varying levels of caution – that the Reserve Bank will indeed yield on Wednesday.
ACT Party leader David Seymour appeared to join the fray when filling in as acting prime minister last month, saying “you don't need an economics degree to see people are hurting, inflation is going down fast and relief is required”.
The most recent economic data has, if anything, only muddied the picture.
Stats NZ reported a slightly lower-than-expected increase in the number of officially unemployed on Wednesday, also reporting a surprise increase in the number of people actually in work and what Moody’s Analytics described as “troubling” wage growth.
ANZ concluded that made a rate cut before November marginally less likely.
But Westpac senior economist Satish Ranchhod says a survey released by the Reserve Bank on Thursday that showed business leaders expected inflation to be almost bang on 2% in two years time would be welcome news for the central bank.
The bank’s chief economist, Kelly Eckhold, is tipping cuts in both October and November.
And it is possible that in practice the Reserve Bank’s decision whether to cut now or wait a little longer might end up making little difference to most borrowers, other than those on floating rates, assuming its overall tone remains dovish.
If the Reserve Bank cuts the OCR by 25bp to 5.25% on Wednesday, the assumption may well be that it will follow-up with the same-sized cuts in October and November.
But if it holds fire — depending on its tone — all may not be lost for borrowers and the assumption may be that larger 50bp rate cuts will be in play for later this year.
“The overwhelming view, as evidenced by market pricing, is that the New Zealand economy is ‘broken’ and that inflation is under control,” Toplis says.
“If the Reserve Bank does nothing in the upcoming meeting, then obviously very short term market pricing must change, but I think the markets will just push easing further down the curve,” he says.
“I don't think where markets are pricing for the middle of next year will change irrespective of what they do — it's just the path to getting there that will be different.”