Analysts at ANZ expect that the RBNZ will once again leave the OCR at 1.75% on Thursday, which is a view shared by the consensus and market and while there may be some tweaks at the margin, ANZ expects the overall tone to remain balanced, watchful and cautious.
“The day we see a shift to a formal tightening bias is coming, but we still think that is down the track and not this week.”
“Numerous recent developments are consistent with the next move in the OCR being up and a tightening bias being needed (and therefore inconsistent with the RBNZ’s explicit neutral tone of there being an equal chance of a hike or a cut). Headline inflation is back above the target midpoint for the first time in over five years and some measures of core inflation are also back at 2%. Additionally, inflation expectations have lifted, the fiscal stance is shifting more neutral (after dragging), capacity utilisation is at all-time highs, the labour market continues to tighten and the NZD TWI is 4½% below the RBNZ’s February forecasts. Activity gauges point to a decent pace of underlying economic growth momentum (and stronger than Q4).”
“It is a backdrop that has left the market happy to test the idea of hikes. By February next year, a hike is around 80% priced. We also see the next move in the cash rate being up, but slightly later (May).”
“However, we doubt the RBNZ is ready to embrace an outright tightening view yet. Despite the positive overall tone to economic developments, it has not been one-way traffic, and we suspect there has been enough in the detail of recent data to leave the RBNZ happy to stay patient. The lift in core inflation is not unanimous (its Sectoral Factor Model remains glued to 1.5%, highlighting the idiosyncratic elements to the lift in headline inflation), and wage growth remains benign.”
“We have been here before and broader inflation pressures have failed to materialise. Given its two failed attempts at tightening since the financial crisis, the RBNZ will want to see actual evidence of higher core and wage inflation before reacting. This is especially the case as financial conditions and a turn in the credit cycle buy the RBNZ time. The RBNZ is also being more active with regards to prudential policy beyond LVR’s (i.e. a review of bank capital requirements), which will interact with monetary policy. Globally, reflationary-type signals are showing signs of spluttering, with commodity prices on the skids of late, and that will do little to allay the RBNZ’s overall cautiousness towards the global scene.”
“So with regard to how the market may react, the risk-return looks to be that subtle shifts are taken hawkishly. That might be right technically, but not the overall spirit of what we suspect the RBNZ will be hoping to convey. But as we know, markets like to jump on small shifts in numbers and words.”