Put it on the house

Market pricing for a cut at the 28 April OCR review has receded a little in the last week, having been close to 50:50 at one point. The housing market has staged a surprisingly strong rebound, while a rise in food prices has reduced the risk of an uncomfortably soft inflation print for the March quarter. That brings the market more in line with our own assessment of the odds: we do expect another OCR cut in the near future, but we currently lean towards June rather than April.

We’ve long been making the case for the OCR to fall to 2% this year, and by the March Monetary Policy Statement the Reserve Bank had joined us in that view. The timing of rate cuts, however, has never been crucial to our view, and we think the next move will come down to tactics as much as fundamentals. Once the OCR reaches 2%, the RBNZ will need to provide some signal as to whether this is likely to mark the end point, or if further easing will be needed.
Unless there’s an overwhelming case one way or the other – and we don’t think there is just yet – the RBNZ can defer making that judgement until the full MPS in June.

We’ll set out our thinking in more detail in our OCR preview later this week, once we’ve had time to digest today’s March quarter CPI release. We expect a mild 0.1% increase in the CPI for the quarter (last week’s higher than expected food prices for March prompted us to revise up our forecast from zero). This would see the annual inflation rate rise to 0.3%, from an historic low of 0.1%.

Our forecast of annual inflation is only slightly below the RBNZ’s forecast of 0.4%, and the difference is entirely on the tradables side, where the RBNZ has more scope to look through temporary price movements. Our sense is that an inflation outturn in line with our forecast would not, on its own, be enough to prompt an OCR cut as soon as this month. However, a substantially weaker result would make the April review a genuine contender for an OCR cut.

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