RBNZ: Market thinks Aug cut stands a 40% chance - Westpac

Imre Speizer, Senior Market Strategist at Westpac, suggests that the market pricing for the RBNZ OCR currently implies only a 40% chance of a cut in August.

Key Quotes

“The recovery in global risk appetite from the Brexit shock two weeks ago, plus a speech from RBNZ Dep. Gov. Spencer saying further cuts to the OCR would present financial stability risk and interpreted by the market as indicating a reluctance to ease, have helped push pricing lower.

We disagree and think a cut in August is likely. While the housing market is a significant concern for the RBNZ, low inflation trumps considerations for monetary policy, and the surging NZ dollar is adding to the RBNZ’s challenge to get inflation higher. It’s worth noting that the RBNZ’s latest forecasts in the June MPS signalled a further 25bp cut in the OCR over the coming year. Based on this, inflation was forecast to get back into the 1-3% target band by the end of this year, and increase to 2% by the end of 2017. Importantly, the projections assumed that the NZ dollar would depreciate, pushing tradables inflation higher. However, the TWI is now 9% higher than the RBNZ had expected at the time of the June MPS.

You’d have to go a long way back to find another surprise of that magnitude. This will be of real concern to the RBNZ, given the significant dent it will put into its inflation forecasts over the next year. If persistent, the high TWI will weigh on medium-term inflation pressures, as it drags on activity in export and import-competing sectors. While house price inflation has increased, the RBNZ had already incorporated relatively strong house price forecasts in the June MPS.”