by Miriam Bell
D-day for the Reserve Bank’s next OCR announcement, on April 28, is looming and, after March’s surprise cut, no one is sure what to expect. Low inflation and a resurgent Auckland housing market means the Reserve Bank’s next OCR move is a guessing game.
While many economists expect more OCR cuts to come this year, the question of exactly when those cuts will be is live.
BNZ senior economist Craig Ebert said they are back into the business of second-guessing what the Reserve Bank will come up with this time.
Predicting New Zealand’s cash rate policy is getting easier and easier, but determining the Reserve Bank’s next pronouncement is not, he said.
As mortgagerates.co.nz has reported, the Reserve Bank is already walking a fine line over cutting rates to boost inflation or hiking them to slow borrowing.
Ebert said a recent speech by Deputy Governor Geoff Bascand proved no clear pointer as to which way the Reserve Bank was leaning on the OCR – although it did depict a cautionary state of mind.
“Never mind that their new Labour Utilisation Composite Index indicated no economic slack… The Reserve Bank would appear to be intent on finding reasons to be ‘accommodative’.”
Economists are waiting on next week’s Consumers Price Index (CPI) quarter one data for further clues as to which way the Reserve Bank might jump.
Ebert said the CPI report is relevant for the next Reserve Bank, but he is not convinced it will be all that important.
“The April review will be hinged on the Bank’s year-ahead forecasts of CPI inflation – and the role the currency is playing in this process.”
For ANZ economists, all eyes are on inflation as, in their view, the Q1 CPI data holds the keys to the timing of the Reserve Bank’s next move.
“With inflation already low (notwithstanding ongoing evidence of pipeline pressures), moderating growth means the OCR is still going lower,” they said.
“And whether that occurs in April looks set to hinge on the Q1 CPI. The decision is certainly ‘live’ but at this stage we don’t think there will be enough for the Reserve Bank to pull the trigger.”
But ANZ remains bullish on the short-end and expects to see two more OCR cuts.
ASB senior economist Jane Turner agreed that next week’s CPI data will be key to the Reserve Bank’s determinations on whether to cut the OCR in April or June
However, even then the result may not be clear cut, she said.
“We expect the CPI index to barely lift, but our forecast is only slightly softer than the Reserve Bank's March MPS forecast.
“Inflation may have to be weaker than this, or the underlying tone of the release disconcerting, to send a message of urgency to the Reserve Bank.”
ASB also expects the Reserve Bank to make two more OCR cuts this year.
While inflation will be a crucial factor in the Reserve Bank’s move on April 28, economists think Auckland’s housing market will be another important consideration.
The latest round of housing market data provides clear evidence of a resurgent Auckland housing market, along with continuing strength in regional housing markets.
Ebert said the pick-up of the Auckland housing market is a serious issue for the Reserve Bank to take into account with its policy settings.
“Nonetheless, we presume the Reserve Bank will continue to pad down its importance, in the grander scheme of trying to boost annual inflation in the headline CPI.”
Turner said the Reserve Bank is likely to comfortably tolerate momentum in regional housing markets.
“But more momentum in the Auckland market could be an uncomfortable position for the Reserve Bank and bring a reluctance to rush rate cuts.”
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