Cash rate call splits market
Big banks have lined up ‘‘four-one’’ in forecasting the Reserve Bank will cut the official cash rate to 0.75 per cent on Wednesday.
That is after BNZ research head Stephen Toplis reluctantly backed his fellow pundits at ANZ, ASB and Kiwibank on Friday.
But Westpac continues to read the tea leaves differently, after economist Dominick Stephens reversed its call at the end of last month. It expects the rate to remain on hold in a decision he describes as a ‘‘nail biter’’.
BNZ’s forecast of a rate cut was almost less than half-hearted. Toplis said he saw ‘‘no overwhelming basis’’ for another cut and no-one should have cause for great surprise if the bank does in fact pause.
The one certainty is that, from the outside looking in, Wednesday’s decision is, well, no certainty.
The Reserve Bank, under governor Adrian Orr, has been accused of wrong-footing the market previously, in particular with the bank’s 50 basis-point cut in August.
Genuine division among analysts and commentators about what the bank will do, and should do, on Wednesday means those complaints will continue, no matter what the decision.
There is plenty of economic data to justify any path so, as usual, guessing the Reserve Bank’s move is mainly a question of judging which particular dots its monetary policy committee chooses to join together.
It may be worth remembering that while there has been a lot of talk about whether negative interest rates are on the horizon, in a real sense the official cash rate (OCR) is already negative, in that it is 50 basis points below the rate of inflation.
Negative nominal interest rates have practical quirks but would not be any kind of new magic, just a bigger dose of what we have now.
Since monetary policy is already delivering a decent stimulus, the question is whether there is fresh evidence, since August, that stimulus should increase.
The dots that ANZ, ASB and KiwiBank have focused on – and that favour another cut – include a decline in employers’ hiring intentions and the International Monetary Fund reducing its global growth forecasts.
ASB says that, despite reduced risks of a hard Brexit, ‘‘a lot needs to go right to prevent the global economy from slowing from here’’.
Fair point. It is also true that most of a 25bp cut has already been priced into the market, so ‘‘inaction’’ by the Reserve Bank would be likely to have a bigger effect than cutting the rate, and the latter might arguably more support the market status quo.
That is especially the case given that if the Reserve Bank does keep rates on hold, it is likely to put into question the easing cycle forecast for next year.
ANZ chief economist Sharon Zollner for example is already forecasting two further rate cuts in February and May, taking the rate down 0.25 per cent.
A canned cut on Wednesday might put that whole trajectory into doubt and create some waves.
The alternative dots that could be linked to encourage the Reserve Bank to hold fire include inflation figures coming in a little higher than expected and a reasonably solid private sector (as well as public sector) wage growth.
ANZ’s business confidence survey in October suggested the number of firms planning to raise prices in the year ahead rose 6 points to a net 24 per cent.
That is not enough to light a fire under inflation but might suggest the existing OCR rate is still working hard.
Sentiment in financial and housing markets is up a little and the dollar is a little lower.
Has anything truly significant happened since August to give a clear direction?
And if not, what is the real placeholding action: Cutting the OCR by a quarter to 0.75 per cent, or holding?
That may be what the Reserve Bank has to decide.