One more cut from RBNZ in Q4?

Wednesday, October 7, 2015 7:44 AM UTC

When the RBNZ cut rates last month, it stuck to its easing bias, using the same line as the July statement "at this stage, some further easing in the OCR seems likely" adding "this will depend on the emerging flow of economic data".

According to RBC capital markets, here is what has happened since the last rate cut and how does that set up the RBNZ for its decision later this month?

NZD is up 1-3% against its major trading partners (AUD, CNY, USD). The Fed surprised with no hike/a dovish statement and now a weak payrolls report has pushed backexpectations of a hike further into 2016.

Domestic data have been mixed - sentiment surveys remain weak

Market concerns over China remain high but

Dairy prices saw the largest jump in five years at the last auction (Sep 15), though it was on diminishing supply.

The RBNZ released a staff paper estimating the nominal neutral 90 day bank bill rate to be 3.8-4.9% (the RBNZ's current estimate of neutral 90d rates is 4.5%). The paper is seen by some as a signal that the RBNZ may be at or near the end of this cutting cycle.

Rates are already ~150bps below neutral. The news flow will be enough for the RBNZ to cut one more time in October. The discussion on the exchange rate in the Sept MPS seems to back that view, "The medium-term inflationary impacts [of higher NZD] would depend on the factors driving the move. One potential cause would be a rebound in export prices.

In such a scenario the medium-term outlook would be for stronger incomes, growth and inflationary pressure." But NZD "could be higher than assumed if the Federal Reserve or other central banks were to delay interest rate increases because of concerns about a weaker or more uncertain economic outlook. In that case, the implication for New Zealand would be both lower near-term inflation and weaker medium- term growth."

"The latter scenario seems feasible, raising the risk that the RBNZ cuts in Oct. But if it is right in thinking it would be the last cut in this cycle, the fallout for NZD should be limited", added RBC.

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One more cut from RBNZ in Q4?

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