RBNZ signals OCR cut for August

Put your money on an interest rate cut in August.

Today's stop gap economic statement – only shoved into the Reserve Bank’s normally well-signalled schedule last week – shows Reserve Bank governor Graeme Wheeler moving – no, striding – towards cutting the official cash rate at his next review on August 11.

The short statement lists the factors the Reserve Bank is weighing up:  most of these factors point towards a cut sooner rather than later.

Heading the list is the exchange rate: not only is it higher than the Reserve Bank’s forecast at the last monetary policy statement in June, it is also higher, on a trade weighted index basis, than the "alternative scenario" outlined in that statement.

That adds “further pressure to the dairy and manufacturing sectors and, together with weak global inflation, is holding down tradable goods inflation,” Mr Wheeler says.

“A decline in the exchange rate is needed.”

Price inflation is also below what the Reserve Bank expected - the annual rate was reported at 0.4% earlier this week, below the forecast of 0.6% – and this is also partly, but not wholly, a result of that high exchange rate.

Other factors listed by Mr Wheeler include "diminished" prospects for global economic growth, and broader, "significant downside risks", following geopolitical events such as the UK European referendum.

Long-term interest rates have fallen, partly in response to these events.

Today's statement concluded with much the same wording as earlier updates – monetary policy will continue to be “accommodative”, Mr Wheeler says – the paragraphs which preceded that, particularly relating to the exchange rate, show the bank will almost definitely cut the official cash rate on August 11.

The strong exchange rate has effectively tightened monetary policy, and therefore to maintain that "accommodative" stance, Mr Wheeler can have little option but to cut the official cash rate.

The only thing that might cause a delay as if the New Zealand exchange rate does not just decline, but absolutely plummets.  

That appears unlikely – although given current global financial volatility, it cannot be totally ruled out.

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