RBNZ likely to pause in October

After considering this week's events, the timing of OCR cutsis expected. The Reserve Bank is expected to pause at 2.75% at its 29 October review, before delivering further rate cuts in December, January and March.

"A 2% terminal rate for the OCR is expected in this cycle. It is sceptical that the lower New Zealand dollar will generate the sustained degree of inflation pressure that the RBNZ is forecasting. Instead, the initial burst of inflation will be short-lived, and that further interest rate cuts will be needed to maintain inflation around the 2% target midpoint over the medium term", says Westpac.

But the call on October OCR review needs to reflect the RBNZ's current thinking. In last week's Monetary Policy Statement, the RBNZ indicated that it expects to deliver only one more OCR cut in this cycle, and it has flexibility around the timing of that cut. At the time, the RBNZ was expected that it would cut again in October, but noted that this was uncertain and data-dependent.

"In time, the RBNZ will come to the view that a 2.5% OCR is not sufficient to achieve its inflation target. But in the absence of some major negative developments in coming weeks, we suspect the RBNZ will wait until its full Monetary Policy Statement in December to consider the case for additional stimulus", added Westpac.

Recent developments, on balance, have probably pushed the RBNZ further away from delivering a fourth consecutive cut. Most importantly, world dairy prices have rebounded sharply in recent weeks, compared to the RBNZ's assumption that they would remain at depressed levels for quite some time.

"New Zealand dollar is likely to reflect the tweak to the OCR profile, the strength of the rebound in dairy prices, and the delay to US interest rate hikes by the Federal Reserve. NZD/USD is now expected to reach a low of 0.61 in the March quarter next year (previously 0.59)", anticipates Westpac.