Traders are evenly split on whether Reserve Bank governor Graeme Wheeler will deliver another interest rate cut this week. Photo / Mark Mitchell
Traders are evenly split on whether Reserve Bank governor Graeme Wheeler will deliver another interest rate cut this week. Photo / Mark Mitchell
Conflicting economic forces weigh heavily on interest rate decision.
What is the lesser of two evils - the housing bubble or low inflation?
It's a tough choice, particularly when you consider the limited ability of monetary policy to definitively solve either problem.
But that is the central dilemma facing the Reserve Bank this week as it juggles mounting pressureto deal with these conflicting economic forces.
Low interest rates have been a contributing factor in the Auckland property market getting back on a roll, while the rolling annual inflation rate has been below 1 per cent for seven consecutive quarters. The Reserve Bank is mandated to set its monetary policy to keep inflation between 1 and 3 per cent with the focus on a mid-point of 2 per cent.
Traders are evenly split on whether Reserve Bank governor Graeme Wheeler will deliver another interest rate cut this week, with the Kiwi dollar flying above the central bank's projections, making imported products cheaper and keeping a lid on inflation.
Financial markets are judging a 54 per cent chance of the official cash rate staying at 2.25 per cent at Thursday's review. Economists are leaning towards a cut coming in June when Wheeler could explain the bank's outlook more fully in a monetary policy statement.
Wheeler surprised the market last month when he cut the benchmark rate to a new record low. While recent inflation figures were in line with the central bank's projections for an annual increase of 0.4 per cent in the year to March 2016, the Kiwi dollar has remained strong as international central banks continue to print money and run extraordinarily low interest rate policies.
"While the March surprise highlights the potential for another [OCR cut], the RBNZ has expressed a preference for moving on MPS as opposed to review dates in the absence of material shifts in information," ANZ Bank New Zealand chief economist Cameron Bagrie and economist Phil Borkin said in a note. "With regards to the currency, it's hard to see how a further rate cut could substantially influence the direction of the [New Zealand dollar] (December and March cuts certainly didn't) amidst actions of other central banks." Westpac New Zealand chief economist Dominick Stephens said the only reason the Reserve Bank would choose to lower rates this week was if it had already decided that the OCR needed to go below 2 per cent.
ASB Bank chief economist Nick Tuffley said it was finely balanced and would come down to whether Wheeler was more concerned about re-emerging price pressures in Auckland's housing market or the persistent strength of the Kiwi dollar.
Kiwibank economist Zoe Wallis - the only local forecaster to pick the March cut - predicts another reduction this week, citing the strength of the Kiwi dollar, soggy business confidence, a deteriorating trade outlook and elevated bank funding spreads.
"We expect the bank to opt for more stimulus sooner rather than later and deliver a 25bps [basis point] cut at [this] week's April OCR review."
