The Reserve Bank has been in an aggressive rate cutting mood since last August. Photo: RNZ
- The RBNZ's latest review of the official cash rate will be released on Wednesday
- Economists' consensus that OCR will be left unchanged at 3.25 percent
- RBNZ seen waiting for more data and US tariff clarity, note there was a dissenter in May
- Opinion divided how many more cuts to come
To cut or not to cut? That is the question confronting the Reserve Bank's monetary policy committee this week.
Economists and financial markets believe the committee will pause after six consecutive rate reductions since August last year.
The Reserve Bank (RBNZ) has been in an aggressive rate cutting mood since it started last August, reducing the official cash rate (OCR) by 225 basis points from 5.5 percent to the current 3.25 percent, including three 50 basis point cuts.
But times have changed, which the RBNZ showed in May with a rare vote in the committee resulting in a smaller cut, much emphasis on uncertainty - mentioned 164 times - and a declaration data would dictate the outlook.
"It will be hard for the RBNZ to cut at this meeting given that post the MPS (May statement) it suggested market pricing would be a key driver of its decision," BNZ head of research Stephen Toplis said.
"In some ways the RBNZ is in a comfortable spot. The market is not looking for a cut in July but still thinks another rate reduction is a done deal with the chance of more. The RBNZ thus will feel no need to rock the boat."
Financial markets give less than a 20 percent chance of a rate cut this week, and about a 60 percent chance of a cut in late August.
Inflation gets a second breath
The RBNZ has maintained that core inflation has been falling towards its cherished 2 percent target point, despite a spike in food and other prices last month.
But ASB economists changed their view recently from a 25 basis point cut to no change, because inflation pressures looked to be strengthening.
"The RBNZ will need to be confident that higher short-term inflation does not risk stoking inflation expectations - this proved extremely difficult for the Bank to re-anchor in the previous cycle."
ANZ chief economist Sharon Zollner was another saying the decision would be a close run thing for the RBNZ, but reluctantly expecting a no-change.
"We think the RBNZ should cut. However, on balance we think the committee will decide it is prudent and low-cost to wait for more data on inflation - and inflation expectations - before cutting in August."
Are we there yet?
If no cut this week, then when, and how many more?
Opinion is divided, with Zollner expecting three more reductions to a low of 2.5 percent by early next year, as the inflation risk does not materialise and the economy stutters.
"We see both consumption and non-tradable inflation undershooting RBNZ forecasts over the second half of the year, and therefore have a follow-up cut in November after another pause in October," adding that a third cut was possible early next year to combat any global headwinds.
Kiwibank economists have been enthusiastic supporters of rate cuts to support the struggling economy.
"Monetary policy is set today to influence the medium-term. And risks to the medium-term outlook are skewed to the downside."
If there is a prevailing view, then presently it is the OCR will be taken to 2.75 or 3 percent, but that, like most things economic, is highly conditional.
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