RBNZ likely to ease further in October

The Governor of the RBNZ gave an interesting speech on the state of central banking, which referred to the risk of low interest rates feeding house price inflation and the need for monetary policy to have regard to the housing market. This was an important change. 

For most of this year the RBNZ has downplayed the housing market when communicating its monetary policy thinking, to the point of including not a single graph of house prices in the September MPS. 

The RBNZ is signalling that housing has made a comeback insofar as monetary policy is concerned - not surprising considering that one measure of nationwide annual house price inflation has shot up to 20.1%, from 8.5% six months ago.

"The "Some further easing" comment is confirmation that the RBNZ is not done with its OCR easing cycle. But given that the RBNZ has previously signalled a terminal OCR of 2.5%, and that the balance of today's comments were hawkish, there can be no suggestion that the RBNZ has switched to targeting anything below 2.5%. The natural conclusion is that the RBNZ is still planning to cut the OCR only once more", says Westpac.

But the speech also strongly suggests that that OCR cut will not occur at the October OCR Review, which takes place in two weeks' time. It seems unlikely that the Governor would go out of his way to make a relatively hawkish speech, including references to moving the OCR slowly and keeping powder dry, if he thought that the OCR was likely to be reduced in October.

"All of this was encouraging for the 2015 OCR forecasts. The RBNZ was expected to keep the OCR on hold in October, but to signal that "some further easing" is coming. And a December 2015 OCR cut was forecasted earlier. There is no reason to alter either of those forecasts", anticipates Westpac.

A 2.5% OCR will not be low enough to ensure that inflation returns to 2% on average over the medium term, and that disappointingly low inflation will eventually force the RBNZ to cut the OCR to 2.0%. 

The OCR will eventually reach 2.0%. But his speech reiterated that the RBNZ does not share this view. Consequently, further OCR cuts which were expected in early-2016 is now under review pending Friday's inflation data, with an eye to shifting towards forecasting OCR cuts below 2.5% at a later time.