RBNZ may hold off cutting interest rates until August, ANZ economists say

Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell

The Reserve Bank may hold off cutting interest rates until August rather than moving in June because the economy isn't looking so bad and it's tactically better to wait longer, ANZ New Zealand economists say.

Reserve Bank governor Graeme Wheeler kept the official cash rate unchanged at his review last month, predicting inflation would pick up as the slump in oil prices washes out of the data and capacity pressures start to build in the economy. Still, he said further policy easing may be required to ensure that future average inflation settles near the middle of the 1 per cent-to-3 per cent target band.

"We now expect the RBNZ to maintain the OCR at 2.25 per cent in June," ANZ's New Zealand chief economist Cameron Bagrie and senior economist Philip Borkin said in a note. "We have felt for some time that a June cut was a line-ball call. Recent developments have, in our view, tipped the balance. Further RBNZ easing is still more likely than not, however."

ANZ said the economy is "showing very few signs of rolling over", despite dairy strains and tighter financial conditions, as activity indicators remain "solid" and business and consumer sentiment hold up at "decent" levels. Global financial markets had also improved, with rising oil prices likely to impact near-term inflation and negate the deflationary impact of a higher New Zealand dollar.

The economists also say the Reserve Bank is unlikely to reduce interest rates at a time when it's mulling new macro-prudential measures to cool an accelerating housing market, and as debt levels increase.

They also note that core inflation appears to be rising, with capacity constraints intensifying particularly in the construction sector and tentative signs of a lift in wage growth. Inflation expectations have stabilised and the Reserve Bank's next survey of expectations for two years out will probably show a small lift, they say.

Tactically, the Reserve Bank will probably prefer to hold rates unchanged in June, as it awaits key inflation and growth data, and giving itself more time for an 'easing bias' to weigh on the currency, ANZ said.

"Baiting the market by holding but with an easing bias is not without (currency) risk. But cutting but signalling no more to come can be worse," ANZ said.

The economists put the odds of a cut in August at about 60 per cent and say global risks mean they expect the rate to fall as low as 1.75 per cent next year.

"The global situation remains vulnerable and the actions of other central banks are keeping the New Zealand dollar stronger than 'desirable'. In a world where currencies are diverging from fundamentals, interest rates must converge, and this is a force we suspect will drag the RBNZ back to the easing table at some stage," they said.

While the government has signalled a more expansionary fiscal stance in the near term, which would support activity, a greater focus on debt repayment in the medium term still argues for low rates for longer, ANZ said.