RBNZ to face communication challenges - Westpac

Dominick Stephens Chief Economist at Westpac explained that whether the RBNZ cuts the OCR next week or keeps it on hold, it is going to face communication challenges.

Key Quotes:

"Giving markets the impression that the OCR reduction cycle has ended could cause the exchange rate to rise in an unhelpful way – this is what happened last December. If the RBNZ does cut next week, it will seek to avoid language that suggests it is finished cutting the OCR."

"More likely, it would opt for non-committal language, such as “further OCR changes will depend on the data.” In the case of an “on hold” decision, the risk is that markets start to doubt the RBNZ’s resolve to cut the OCR any further at all. If the RBNZ leaves the OCR on hold as we expect, its 90-day interest rate forecast is likely to remain at 2.1%, firmly indicating that one more OCR cut is expected."

"The RBNZ’s rhetoric would presumably be equally firm. A repeat of the April OCR phraseology would probably suffice: “Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data.” While we expect the OCR to remain on hold in June, we do expect that the RBNZ will eventually conclude that an OCR reduction to 2.0% is necessary. Hence, we consider market pricing for an OCR reduction by August – currently 50% – is undercooked."