RBNZ scenraios

The consensus among economists and the market is for a 25bp cut, but there is a range of opinions regarding the extent and timing of additional easing. Westpac explores three possible scenarios and predict the market reactions:

(a) neutral from the market's viewpoint (75% chance) - a 25bp cut accompanied by guidance via forecasts and the narrative that another 25bp cut to 2.5% is on the cards. The 90 day interest rate forecast would show a low of between 2.6% and 2.7%, while the policy sentence would read something like: "At this point, some further easing seems likely. The timing will depend on the data." In response, the 2yr swap rate would fall by around 4bp because an OCR of 2.5% is not fully priced (see Table 1). NZD/USD would fall by 1/4 cent.

(b) dovish (20%) - a 25bp cut, accompanied by guidance that another 25bp cut is likely and there may be even more after that. The 90d track would trough at 2.4%-2.5%, while the policy sentence would read: "At this point, some further easing seems likely. The timing and extent of easing will depend on the data." Markets would need to price in some chance of a sub-2.5% OCR. The 2yr swap rate would fall by 14bp and NZD/USD would fall by 1 cent.

(c) hawkish (5%) - a 25bp cut, accompanied by guidance that the easing cycle is probably over. The 90d track would trough at 2.9%, while the policy sentence would read: "...we will monitor economic developments as they arise." The 2yr swap rate would rise by 12bp, while NZD/USD would rise by 1.5 cents.

"We expect the RBNZ to cut the OCR by 25bp at Thursday's RBNZ Monetary Policy Statement, and to signal another cut is likely. NZ swap rates and the NZD should fall slightly in response," Westpac noted.