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ANZ tipping rates cut to be on hold

NZN 13/05/2016 Tina Morrison

The Reserve Bank may hold off cutting interest rates until August rather than moving in June because the economy isn't looking so bad and it's tactically better to wait longer, ANZ New Zealand economists say.

Reserve Bank governor Graeme Wheeler kept the official cash rate unchanged at his review last month, predicting inflation would pick up as the slump in oil prices washes out of the data and capacity pressures start to build in the economy.

Still, he said further policy easing may be required to ensure that future average inflation settles near the middle of the 1 per cent-to-3 per cent target band.

"We now expect the RBNZ to maintain the OCR at 2.25 per cent in June," ANZ's New Zealand chief economist Cameron Bagrie and senior economist Philip Borkin said in a note.

"We have felt for some time that a June cut was a line-ball call. Recent developments have, in our view, tipped the balance. Further RBNZ easing is still more likely than not, however."

ANZ said the economy is "showing very few signs of rolling over", despite dairy strains and tighter financial conditions, as activity indicators remain "solid" and business and consumer sentiment hold up at "decent" levels.

The economists also say the Reserve Bank is unlikely to reduce interest rates at a time when it's mulling new macro-prudential measures to cool an accelerating housing market, and as debt levels increase.

They also note that core inflation appears to be rising, with capacity constraints intensifying particularly in the construction sector and tentative signs of a lift in wage growth.

Tactically, the Reserve Bank will probably prefer to hold rates unchanged in June, as it awaits key inflation and growth data, and giving itself more time for an 'easing bias' to weigh on the currency, ANZ said.

The economists put the odds of a cut in August at about 60 per cent and say global risks mean they expect the rate to fall as low as 1.75 per cent next year..

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