100pct chance of official cash rate cut


It looks certain the Reserve Bank will cut the oficial cash rate (OCR) on Thursday.

But although the markets are pricing in a 100 percent chance of a rate cut, there are some key questions.

Most economists think the Reserve Bank (RBNZ) will cut the OCR by 0.25 percent when it issues its monetary policy statement on Thursday.

But there have been suggestions that RBNZ Governor Graeme Wheeler could cut it by half a percent.

However that seems unlikely, given the Reserve Bank has only cut by half a percent in times of crisis, like the global financial crisis and the Canterbury earthquakes.

The OCR has been cut by half a percent since the start of December 2015 but only about 35 basis points (0.35 percent) has been passed on to customers.

The banks say their funding costs have gone up, because they are paying more to borrow money from offshore to lend locally. Some banks have also trimmed some mortgage rates lately in anticipation of the OCR review.

Over in Australia the banks are facing increasing criticism for not passing on the full rate cuts made by the Reserve Bank of Australia.

We are coming into earnings season and the Australian owned banks are expected to unveil some very big profits. So it will be interesting to see whether the criticism grows here in New Zealand as well.

If the banks are reluctant to trim mortgage rates, then what about deposit rates? Savers certainly won't want to see their interest rates cut by more than the amount that the banks are trimming mortgage rates.

Craig Investment Partners' Mark Lister says the last set of economic projections from the RBNZ suggested a low point of two percent for the OCR, but markets will be expecting this to be reduced further.

Most economists are now forecasting the OCR to fall to a low of 1.75 percent. But Mr Lister says an even lower OCR seems possible, considering how weak inflation is and the fact other central banks are lowering their rates.

The more other central banks cut their rates, the more it makes New Zealand's rates look relatively high and therefore more attractive. 

That encourages people to pour money into New Zealand, driving up the value of the New Zealand dollar. Neither the RBNZ nor exporters want the dollar to be as high as it is. One way to lower the dollar is to cut interest rates.

But the Reserve Bank is in a tricky spot. It wants to cut rates, but any cut might fuel the property market. Hence the RBNZ's recent move to tighten up the rules for property loans.

The dollar and the housing market will both be important factors in determining how low the OCR ultimately goes.


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