Economists split on chances of interest rate cut
There is half a chance the Reserve Bank will cut official interest on Thursday, with some economists picking a cut, while others expect no change, just yet.
ANZ Bank chief economist Cameron Bagrie said it was ‘‘action stations’’ for the Reserve Bank this week in its Monetary Policy Statement.
Financial markets were divided over whether the central bank governor Graeme Wheeler would drop rates from 3.5 per cent, but they were anticipating 50 basis points of cuts by the end of the year.
‘‘The official cash rate should be lower,’’ Bagrie said in a note yesterday. Core inflation was receding and the central bank had an inflation target, first and foremost, not a growth or housing target.
The three factors were connected but inflation dominated, he said. There were risks that growth could be slower than expected.
The economy was not weak, but a few more cracks had appeared and the momentum was starting to slow from previously strong rates of growth. At the same time inflation remained ‘‘extremely benign’’.
‘‘If inflation has remained so benign when the economy has been so strong, where will it head with the economy moderating and risks skewed to weaker outcomes?’’ Bagrie said.
However, Bank of New Zealand economists said yesterday they still expected the Reserve Bank to ‘‘sit and wait’’. There was a case for rates to be cut, but ‘‘later on, not right now’’.
The Reserve Bank had made it clear in April that they would only cut rates if demand was weaker and wage and price-setting outcomes settled at levels below the 1 per cent to 3 per cent inflation target.
Those preconditions for a cut were ‘‘far from being met’’ BNZ senior economist Craig Ebert said.
There were no strong reasons for the Reserve Bank to unwind the interest rate rises of last year, less than a year after they went up. That would be to invite criticism for a policy mistake last year, which BNZ said they believed the central bank did not make.
If the central bank made a mistake it was the same as everyone else, missing the extent of the fall in dairy prices and the dive in oil prices, BNZ said.
But the Reserve Bank may suggest some trimming of interest rates later down the track in its statement.
ASB chief economist Nick Tuffley expected the Reserve Bank to hold the cash rate at 3.5 per cent but ‘‘explicitly’’ forecast a fall in rates on Thursday.
There was a degree of uncertainty about when the central bank would cut rates – ‘‘June is a real possibility’’. But Tuffley put that at around a 40 per cent chance of a cut this week. The tight call was reflected in market pricing. The interest rate market had priced a ‘‘50:50’’ chance of a 25 basis point rate cut on Thursday, and a 100 per cent probability of a cut by July. Two cuts were expected in the next seven months or so.
ANZ’s Bagrie said that if the Reserve Bank held rates steady on Thursday, it would be a challenge to keep the currency down, even if the bank indicated rates may come down in future.
Short-term interest rates should fall if the Reserve Bank cuts rates this week, especially with the prospect of another rate cut next month.
The currency fell about US5c in May, but the still high dollar remained a headwind for exporters.
And it needed to come down even more, Bagrie said.
The dollar was trading at US70.5c late on Monday, down from about US75.4c at the start of May.