When the Reserve Bank published its June MPS, it also published two alternative scenarios detailing how it might deal with the two obvious risks in each direction for the economy.
In the first scenario (involving a higher TWI), more cuts were needed, yet in the second (strong house prices) it said hikes were needed. So what do you do when you’re simultaneously tracking down both scenarios at the same time?
Over the medium term, it seems logical that the bank would cut, but hit the housing market with a targeted (macro-prudential) policy response to blunt the impact of lower rates. But that doesn’t make it easy to make a decision in August any easier, especially given the Bank’s limited macro-prudential war chest, and data suggesting that most housing investors aren’t really high LVR borrowers anyway.
Over time, we do expect rates to converge (ie: OCR cuts to narrow the wedge to global rates) – it’s inevitable.
But as to when and by how much – it’s hard to argue with much clarity at this juncture. For our part, we expect the NZD to remain elevated and for bellwethers like the 2-year swap to continue grinding down to 2%.
Let’s not also forget there are moving parts elsewhere too – with today’s RBA decision and Friday’s US non-farm payrolls the next two big cabs off the rank.
__- ANZ __
