Banking News

ASB forecasting NZ central bank to cut interest rates

(5 June 2015 – New Zealand)  In ASB Bank’s latest economic note, chief economist Nick Tuffley said the Reserve Bank of New Zealand (RBNZ) would likely cut the official cash rate when it releases its June Monetary Policy Statement.

ASB economists expect the RBNZ’s easing bias to become more pronounced, including an explicit forecast of a fall in interest rates. 

Since the April OCR Review, events have largely pointed to the risks of inflation pressures being weaker than the RBNZ already envisaged.

“Wage pressures are likely to remain more subdued than the RBNZ has anticipated,” Tuffley writes in the report.

“A combination of strong migration and high levels of labour force participation means the pool of available workers has been growing faster than the RBNZ had assumed. 

“Dairy prices have weakened slightly further, and Fonterra’s opening forecast for the new season is likely to reinforce dairy farmers’ spending restraint. 

“Business confidence has also taken a recent tumble. 

“The RBNZ and Government’s added housing actions will both reduce housing-related inflation at the margin and give the RBNZ some comfort that the housing impact of lower mortgage rates will be countered.”

Tuffley also said it is quite possible the RBNZ bites the bullet and cuts the OCR in June, on which ASB puts around a 40 percent chance. 

“But, in our view, for that to happen requires some sort of ‘Wheeler Factor’, such as a step back and look at the big picture of where the low recent and future inflation outcomes sit against the medium-term aspect of the inflation target.

“But we think the RBNZ will choose to wait a little longer before cutting the OCR. 

“Consumer spending and population growth remain very strong.” 

Inflation expectations have lifted in response to the rebound in petrol prices, reducing for now concerns that low inflation could alter wage- and price-setting behaviour.

ASB believes a cut in June would very likely be followed up in July, and markets would increasingly price in future cuts.