RBNZ: extremely hawkish outlook is on hold - Westpac

Analysts at Westpac explained that they expect the RBNZ to cut the OCR to 1.75% at Thursday's MPS, and to retain a mild easing bias.

Key Quotes:

"This should be market neutral, although the main risk is the RBNZ's guidance is interpreted hawkishly.

The RBNZ gave strong easing signals in its August and September statements, as well as in a speech in October. While developments since the August MPS have weakened the case for easing, failure to deliver would lead to an unwanted and self-defeating market response (see here for details).

Our base case is for a 25bp cut, a slight increase in the OCR projection from 1.6% to 1.7% (terminal), and a mild easing bias along the lines of: “Further policy easing may be required if conditions warrant it”. We assign a 55% chance to such a scenario, which shouldn’t ruffle the NZD markets too much, although swap rates could retrace recent gains.

Our dovish scenario would see the RBNZ cutting by 25bp as well as signalling more to come via an OCR projection at 1.6%. However this is very unlikely (5% chance we think) because economic conditions have improved overall.

Our hawkish scenario (a 20% chance) has the RBNZ cutting by 25bp but increasing its OCR projection to 1.8% and shifting to a neutral bias. Markets would conclude the easing cycle is over and thoughts would turn to eventual tightening.

Our extremely hawkish scenario (20% chance) sees the RBNZ on hold but retaining its explicit easing bias. Markets would be stunned given the RBNZ’s strong easing signals to date."