Imre Speizer, Research Analyst at Westpac, notes that the market pricing for a November OCR cut from RBNZ has rebounded over the past week, from 66% to 84%, in good part due to RBNZ McDermott’s reminder the OCR will be cut further.
“The Q3 CPI report (due on Tue) will show annual inflation at only 0.2%, which would mean that we’ve had two full years with inflation below the bottom of the RBNZ’s target band. With inflation lingering at low levels, and associated downside risk for inflation expectations, another cut in the OCR is on the cards for November. Consistent with this, the recent speech by McDermott reiterated its earlier guidance “that further policy easing will be required to ensure that future inflation settles near the middle of the target range.” This will take the OCR to a new record low of 1.75%.
But while a November rate cut is a near certainty, there is more of a question about whether the OCR will need to be cut even further. Economic activity is continuing to strengthen, which means the OCR is likely to remain on hold at 1.75% for some time. However, there are plausible downside risks, such as the NZD rising, or inflation expectations falling further.”