OCR expected to stay put

  • 19/09/2016
OCR expected to stay put

It is a big week for homeowners, savers, farmers, investors and pretty much everyone else.

The Reserve Bank (RBNZ) will review the official cash rate (OCR) on Thursday. That decision will be announced just hours after the Federal Reserve reviews US interest rates.

Both events could move the New Zealand dollar.

That is not the end of the news on Thursday. Fonterra will also announce its full-year profit result.

A day earlier there will be a GlobalDairyTrade auction and new migration figures will be released.

The markets are predicting the Reserve Bank will keep the OCR on hold at 2 percent.

The expectation is that a rate cut is more likely when the RBNZ reviews rates again in November.

RBNZ will issue a written statement explaining its decision. Traders, economists and the staff of the commercial banks' mortgage departments will be scrutinising the statement for clues as to a potential timetable for future rate cuts.

The prospect of lower interest rates could move the dollar. Lower rates would also give the housing market a lift and could be expected to boost the share market.

Lower rates make borrowing more attractive for homeowners and businesses. But those same lower rates are an incentive for savers to look at alternatives to the banks, such as share market listed companies that pay high dividends.

If the US Federal Reserve was to lift rates, that would likely boost the value of the American dollar and weaken currencies like the kiwi.

The Fed's key lending rate is sitting at 0.5 percent. The markets have been second-guessing what the Fed might do. It had looked it was leaning towards lifting rates at this meeting. But some weaker US economic data now makes that seem less likely.

The kiwi was sitting at 72.76 US cents at 7am Monday. It was trading at 96.83 Australian cents and 55.87 British pence.

Fonterra is looking at a much improved financial result.

When milk prices are low it reduces Fonterra's input costs. That gives it a helping hand as it turns the milk into value-added products.

Analysts are predicting a much-improved result compared to last year's 12-month profit of $506 million.

Fonterra has indicated earnings will be between 45 and 55 cents per share. So shareholder farmers will be looking at a total payout for the 2015/16 year of $4.30 (a milk payment of $3.90 per kilogram of milk solids, plus a dividend payment of 40 cents per share).

That is well below break-even point for farmers.

But the current season is looking much better. Fonterra is forecasting a farmgate milk price of $4.75. But there are expectations that it will be revised upwards, above the breakeven point of $5.05.