BNZ says Reserve Bank sounding less committed to November rate cut

Wednesday, 30 October 2019

Doubts are growing that the Reserve Bank will cut its interest rate below 1 per cent in November.

The change in mood is positive for savers but means even lower mortgage rates may not be just around the corner.

The Reserve Bank wrong-footed financial markets in August when it lopped half-a-percentage point off the Official Cash Rate, helping fuel speculation the rate could fall below zero if economic conditions deteriorated further.

Most analysts had been confident the bank would cut rates again on November 13, and probably also in February and May next year, taking the cash rate down to 0.25 per cent.

**READ MORE:

* Soaring domestic airfares and higher rents help hold up inflation at 1.5%

* Reserve Bank expected to take a breather after slashing OCR to 1% in August

* ANALYSIS: Reserve Bank had little to lose with its big throw of the dice**

But a speech by Reserve Bank assistant governor Christian Hawkesby in Sydney on Monday has resulted in more second-guessing.

Hawkesby said the August rate cut was based on analysis by the bank that suggested it should deliver about a 60 basis point stimulus 'over the next 12 months'.

His speech appeared to cast the rate cut decision in terms of bundling together the 25 basis-point cuts that analysts had previously expected in August and November into an early hit.

BNZ research head Stephen Toplis said the Reserve Bank was 'starting to sound less than committed to another cut next month'.

Hawkesby's speech reiterated recent messages from the bank about August's 50 point cut being 'a front-loading of stimulus', he said.

'This follows his comments from last week that he was 'very happy' with the way interest rates cuts are feeding through the economy.'

But Toplis called on the bank to be 'more explicit' if it wasn't comfortable with the market still pricing-in a November rate cut.

'Otherwise it's coming across as the bank starting to hedge its bets,' he said.

The pressure for a further rate cut appeared to reduce earlier this month, when Statistics NZ reported a 0.7 per cent increase in consumer price index in the three months to the end of September.

That was slightly higher than most analysts' forecast of a 0.6 per cent rise.

However, Statistics NZ confirmed the inflation rate would have come in at the expected 0.6 per cent had it not been for its estimate that domestic airfares jumped by almost 16 per cent from the June quarter.

Air New Zealand said the increase reported by Statistics NZ was 'much higher than what our own data suggests', and Kiwibank senior economist Jeremy Couchman described it as a 'surprise'.

But Statistics NZ spokesman James Weir said it was comfortable with its estimate, which was based on sampling off-peak airfares across 17 selected routes.

'We collect airfares monthly from a mixture of direct data supply from airlines and internet collection,' he said.

'We regularly contact data suppliers in various sectors, including airlines, to understand movements that we see.

'In this case, we sought more explanatory information from our data suppliers. Statistics NZ is confident in the data that we have calculated and published.'

The next clue to future interest rates is likely to be provided on Thursday, when ANZ will release the results of its monthly business confidence survey – the last analysts' will see before the Reserve Bank's next monetary policy statement.

Business confidence plummeted to a 10-year low in September, when a net 54 per cent of respondents reported that they expected general business conditions to deteriorate in the year ahead.

Toplis said BNZ would be watching to see what businesses said about their pricing intentions, and what that might say about future inflation.

'These were quite strong in September's ANZ survey, and in construction were still above average. And even the slippage in pricing intentions in the services sector was to a level only slightly below the norm,' he said.