by Jenny Ruth
"In June we made a fairly aggressive call that rates would go a lot lower, which ultimately we’ve had to step back from," says chief economist Ulf Schoefisch.
The key reasons for the change are that the New Zealand dollar hasn’t appreciated as much as Deutsche Bank expected, global growth is picking up and the domestic economy has been stronger than expected, Schoefisch explains.
Take employment which grew a stronger-than-expected 0.8% in the second quarter, halting a declining trend, or retail sales which grew a faster-than-expected 1.5% in the June quarter and the extremely robust housing market in which the median house price keeps breaking new records. New housing starts are currently running about 40% above their normal level.
Schoefisch’s view is that migration, a key factor in driving the housing market and the economy and which added 1.1% to the population over the past year, may be calming down somewhat. From more than 42,000 over the past year, the annualised rate over the last couple of months has been only 30,000 to 35,000, he says. Still, that could just be a temporary blip.
Nevertheless, the same problem that had the central bank start cutting rates in late April from 5.75% still remains, that of "a two-speed economy," Schoefisch says.
"The problem is still there – the trade data is very poor." The trade deficit in the June quarter widened to about 2.3% of gross domestic product. And the New Zealand dollar is still rising, increasing the squeeze on exporters.
"It is highly likely that the Reserve Bank would cause a further rise of the New Zealand dollar if it confirmed that the easing cycle has come to an end. Considering the concern about the rising currency, we therefor expect the Reserve Bank to explicitly maintain its easing bias by arguing – similar to the July statement – that further rate cuts may be necessary," he says.
Indeed, if the currency continues to rise, Schoefisch thinks the central bank will cut the OCR to 4.75% in late October.
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