RBNZ's OCR outlook beyond September

Sooner or later, the RBNZ will cross the 2.5% threshold. New Zealand is entering a significant economic slowdown at a time when core inflation is already well below the RBNZ's target, meaning monetary policy has a great deal of work to do. The falling exchange rate will not generate enough inflation to meet the RBNZ's medium-term target.

"A consecutive 25bps OCR cuts are forecasted between September and January. This would take the OCR to a new all-time low of 2.0%. But at this stage the RBNZ does not share our view, and that creates a risk that the OCR takes longer to get to 2.0%", says Westpac.

In particular, what the RBNZ does at the October OCR Review is genuinely uncertain and data dependent. If New Zealand's housing market were to turn, inflation data (due mid-October) were to weaken, or the Federal Reserve were to signal a delay to its hikes, then the RBNZ would most likely cut the OCR in October. 

However, a scenario could be imagined in which global dairy auction prices continue to rise, Fed hikes occur, and New Zealand's housing market holds up. In that case, the RBNZ may very well choose to pause in October. It is data dependant.

"Beyond October the path to a lower OCR should be clearer. New Zealand's economic backdrop will have weakened materially and the housing market will have slowed by December. If that is correct, the idea of the OCR dropping below 2.5% will enjoy wider acceptance", added Westpac.