Wednesday, 17 April, 2019

UBS: Kiwi cuts in May and August

{9N} UBS: Kiwi cuts in May and August {9N}

We now expect the RBNZ to follow through with action… The surprise dovish shift by the RBNZ at the 27 March OCR review caused us to remove hikes (pencilled in to start in May next year) from our forecasts. We now take the next step and expect the RBNZ to actually follow-through with the guidance that ‘the more likely direction of our next OCR move is down’.

… cutting the OCR 25bp in May and August
While we are yet to be convinced that cuts are necessary at this point in time, market pricing, and a shifting consensus, offers a chance to validate expectations that could prove difficult to resist. If a cut is forthcoming on 8 May, unless there is a material domestic/global growth improvement, we anticipate another cut on 7 August.

Data-flow unlikely to stand in the way of a May cut… The Q1 QSBO (lowest expectation since 2011) reinforced downside domestic risk and it is unlikely the next ANZ Business Outlook (26 April) will alter that. We don’t think the Q1 CPI (17 April, UBSe 0.3% q/q / 1.7% y/y) will prevent a rate cut & the Q1 labour market statistics (1 May) are unlikely to threaten the view of a tight labour market but modest wage inflation.

OCR cut may also be the policy option of ‘least regret’…If the RBNZ MPC does cut in May, what is the risk of this being a mistake? While it’s possible of course, if it means more growth/employment & inflation rising the target mid-point sooner, then we may be discussing the need to hike sooner rather than later. If, however, there is no cut and it proves necessary, this could be the more challenging scenario given there are only 175 basis points to work with.