08 Aug 2019 |
RBNZ Monetary Policy Statement "Peacetime Mobilisation"
The RBNZ caught the market and economists by surprise yesterday with a 50-basis point cut in the OCR to 1.00%. The surprise came in the extent of the move because, whilst the market had been pricing in 50bps of cuts, they had it spread 25bps in August and another 25ps in the first quarter next year.
The RBNZ acknowledged the slowing domestic and global growth and elected to pre-emptive describing the move as “necessary” to help support employment and inflation. Indeed, although they did not indicate specifically that further cuts were likely, but didn’t rule them out either, they stated that they were encouraged that the Govt’s planned fiscal stimulus, coupled with the rates cuts to date, would be sufficient to provide that support to growth over 2020, and thereby avoid more dramatic moves. The market was not so convinced and has now priced in one further rate cut by Feb-20, with Westpac also forecasting another one but earlier in Nov.
The market reaction on the day was sharp with the NZ Dollar falling over 150 points to just under 0.6400 (then a small rally back to 0.6450 overnight), and swap/fixed rates fell between 15-20bps across the curve
The economists review of the MPS is attached with the key points being:
- The RBNZ has made an unprecedented decision to cut the OCR 50 bps in a non-emergency situation.
- There was no signal of imminent further cuts, so we doubt the RBNZ will move again in September.
- But the new MPC has shown its willingness to react to adverse economic news, and the current downturn is likely to get worse before it gets better.
- Therefore, we now expect the RBNZ to cut the OCR to 0.75% in November.
- The consequence of this will be a housing market upturn.
- We were already forecasting 7% house price inflation next year, and the risk to that call is now to the upside.
Risk Management Solutions
Westpac Institutional Bank