MNI INTERVIEW: Market Underpricing RBNZ Cut Chances - Ex Econ

The market is underpricing the risk of another 25-basis-point cut to the Reserve Bank of New Zealand’s 3.25% official cash rate at next week’s monetary policy committee meeting, at which another split vote is likely, a former official told MNI.

The decision is “on a knife’s edge,” with a 55% chance of a cut, said Michael Reddell, independent economic commentator and former special adviser (economics) at the RBNZ, pointing to the MPC’s previous May decision to cut that came down to a 5-1 vote, with concerns over inflation expectations driving the sole dissenter. (See MNI INTERVIEW: RBNZ's Uncertainty To Persist-Chief Economist)

Market pricing gives just a 15% chance of a cut next week, with odds rising to 51% for the Aug 20 meeting.

“My view is that they should cut by another 25bp, and probably a further 25bp in August,” Reddell said in an interview, highlighting recent activity and employment survey data showing either sustained or renewed weakness.

“And given a starting point that everyone agrees involves a materially negative output gap, I think the case for a cut is fairly strong.”

Reddell in April warned global trade chaos could lead the RBNZ to cut to 1% within 12 months. (See MNI INTERVIEW: RBNZ OCR Below 1% Possible On Trade Woes)

COMMUNICATION MISSTEPS

Had the MPC and acting Governor Christian Hawkesby coordinated their messaging more clearly in May, expectations for the July meeting would look different, Reddell argued. “The MPC has form of lurching from one meeting to the next, i.e. not allowing past comms mistakes to define their future moves,” he added.

The May Monetary Policy Statement included an OCR track agreed upon by the MPC that had the rate at 2.9% by December, Reddell noted, but said Hawkesby undermined this during the post-decision press conference.

Hawkesby in May stressed the high degree of uncertainty around the Bank's central projections, noting the committee did not have a bias either way in terms of its next step.

“Are inflation expectations measures a bit disconcerting? Yes, they are but given the real activity starting point and the absence of any evidence of people acting as if core inflation will linger higher, I think they should look past those indications, while remaining vigilant of course,” Reddell argued.

He said the picture would be different if housing inflation were accelerating or the labour market stronger with elevated private-sector wage demands. “But that isn't where we are at present,” he said. “[The RBNZ] need consistent messaging – which of course is easier for OCR reviews than for MPSs – but it does highlight the problem of a forward track; it is hard to see how everyone could have signed up to it, and yet not had consensus on the OCR move itself. It was probably mostly a rookie error.”