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Pre-emption over sitting on the fence - ASB

Contributor:
Fuseworks Media
Fuseworks Media

Current market pricing is sitting on the fence, but we believe there is a strong case for cutting the OCR, with the RBNZ to follow through and deliver a 25bp cut in the November Monetary Policy Statement (MPS).

Recent financial market sentiment has perked up, the global scene is looking a little brighter and global interest rates have firmed. The message from global central banks is becoming more nuanced. Interest rate sensitive pockets are stirring, and the housing market is looking perkier. The NZD is lower and the inflation starting point looks a little firmer than the RBNZ has previously factored in.

However, the growth outlook for the NZ economy still looks subpar, which should prompt the RBNZ to consult its regrets analysis manual and decide to take out additional insurance to keep the economy on track. Global growth is still slowing. Subdued domestic business sentiment is a signpost of the pressures weighing on the economy and the risk remains that firms retreat into their shells, cutting back on investment and employment activity and slowing growth and employment. Despite the OCR being at a record low, the pending introduction of higher bank capital requirements already looks to be hampering credit availability for key sectors of the economy. In the absence of additional monetary stimulus, (already low) medium-term inflation looks set to move lower and spare capacity in the labour market is likely to increase.

After delivering a further 25bp cut, we expect that the Statement will leave the door open to prospective further easing. Not doing so would see both the NZD and NZ wholesale interest rates shoot higher. We do not expect 0.75% to be the lull in the OCR this cycle, with several catalysts that could prompt follow-up action next year. Recent global optimism looks unlikely to be sustained and NZ’s growth is likely to continue to disappoint. There is also the risk that (higher) bank capital requirements have a greater dampening impact on the economy than what the RBNZ expects.

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