- The RBNZ reaffirms its strong easing bias at the September OCR review.
- We continue to expect a cut in November, focus is now on if further cuts will be required early next year.
- Weak inflation measures, a higher TWI and increased funding costs are the main factors that could prompt a second cut.
RBNZ left the OCR unchanged at 2% at the September OCR review, as widely expected. However, the RBNZ did deliver a clear message that it anticipates cutting at least once more – helping correct market pricing for rate cuts (which had drifted higher in recent weeks) and helping nudge the TWI lower. The statement was as we expected and largely similar to August’s. A key focus was the RBNZ’s language on the NZD – which is that it still needs to be lower despite the RBNZ conceding that some of the recent lift is warranted by higher dairy prices.
The RBNZ appears fairly wary of recent data upsides. This likely reflects the fact that inflation risks remain so heavily skewed to the downside and as a result the RBNZ does not want to place too much weight on stronger growth when inflation pressures are still surprisingly weak. Recent GDP growth figures were deemed ‘consistent’ with expectations, so the RBNZ is not banking too much upside from the positive revision. Likewise, the RBNZ took a conservative approach to the dairy price outlook as it remains early days in the season (in contrast we remain very confident that recent price gains will be sustained).
From our perspective, a November OCR cut is largely a done deal. The RBNZ maintained a strong easing basis (further policy easing will be required). Furthermore, inflation risks remain skewed to the downside so it seems fairly unlikely for data to outperform to such an extent the RBNZ refrains from cutting further. Also, the RBNZ learned the hard way that by opting to delay a cut (as it did in June) risks losing credibility with the market and seeing the NZD higher (all else equal).
How future economic data evolve will influence the probability of further cuts early next year. The RBNZ was 50/50 on this risk back at the August MPS, and the tone of the September statement suggests this balance of probabilities has not altered significantly. The key events ahead of the RBNZ’s November MPS include CPI (18th October), inflation expectations (Consensus Economics mid-October, RBNZ Survey 2nd November) and Q3 labour market data (2nd November). In addition to these releases, the path of the TWI will also be a key driver of policy as well as any further stretch in funding costs (see chart of the week).
The NZ economic calendar is fairly quiet over the next few weeks. On Friday we get another monthly read on building consents and business confidence. Business and consumer confidence are both now gradually improving – and encouraging sign that RBNZ stimulus is gaining traction. Next week’s Quarterly Survey of Business Opinion will provide more additional insights into business conditions over the September quarter. Key metrics such as difficulty of finding labour and reported price/cost increases will be closely scrutinised by the RBNZ before the next full review of its own economic forecasts.