In a Reserve Bank Observer Update today, HSBC announced they have changed their call on the likely date of another OCR cut.
The bank’s chief economist, Paul Bloxham, said the Reserve Bank will cut the OCR further – but it won’t be in June as they previously expected.
“We remain of the view that the Reserve Bank still has a problem with low inflation and will still be worried about the level of inflation expectations.
“But we now favour a 25bp cut in August, after the second quarter CPI print.”
If the Reserve Bank was desperately worried about inflation, there was nothing to prevent it cutting the OCR again in April, yet it chose not to, Bloxham said.
“Not much has changed on the domestic economy since six weeks ago, or indeed, since it cut the cash rate to 2.25% on 10 March.”
Rather, growth has remained strong, the first quarter CPI print was in line with the Reserve Bank’s forecasts, and inflation expectations have lifted slightly.
On top of this, the ongoing strength of the housing market is a concern.
Bloxham said the global interest rate environment has also shifted somewhat, with growing chances of a US Federal Reserve hike in July.
This would be a positive development for the Reserve Bank as it should lead to downward pressure on the NZD, which would help inflation and support growth.
For these reasons, HSBC thinks the Reserve Bank will wait a bit longer to cut the OCR, Bloxham said.
“This tactic would have the added advantage of allowing the Reserve Bank to see the second quarter CPI print and to get a bit more clarity on the Federal Reserve’s likely moves.”
Not so long ago, expectations of a June cut to the OCR were dominant among commentators.
However, recently, a change in tone has started to become evident.
Last week, both ANZ and BNZ cast doubts on the likelihood of an OCR cut in June, while ASB said it was now a 50:50 proposition.
