RBNZ expected to cut OCR to record low of 0.75% – Rabobank

Analysts at Rabobank note that Bloomberg's survey indicates that 16 out of 21 forecasters expect the RBNZ to cut the Official Cash rate (OCR) tomorrow to a record low of 0.75%.

• “The money market had been harbouring more doubts but on the back of this morning’s release of soft inflation expectations data from the RBNZ, a move this week almost appears as a done deal. A rate cut tomorrow would underpin our view that NZD/USD is heading lower towards 0.60 on a 12-month view.
• In the run-up to this month’s RBNZ policy meeting market expectations regarding whether or not the RBNZ would cut rates have been particularly volatile.
• In spite of the criticism, the RBNZ has adopted a very pre-emptive position on policy this year. It was the first G10 central bank to ease in 2019 and its 50 bps move in August was larger than expected. By taking the market by surprise the RBNZ was arguably able to increase the impact of its rate cuts and accentuate the impact on the NZD. Relative to its March highs NZD/USD is currently trading over 8% lower. That said, despite the softening in monetary conditions, inflation expectations have failed to push higher.
• This morning release of the RBNZ’s measure of 2 year ahead inflation expectations showed a fall to 1.80% in Q4 from 1.86% in Q3. The 1 year ahead measure dropped to 1.66% from 1.71% in the last reading. The release created a surge in expectations that the RBNZ will bite the bullet and announce an additional cut in rates at tomorrow’s meeting.
• Supporting another rate cut tomorrow is the news that some of the steam has been taken out of the domestic housing market in recent months.
• A crucial part of tomorrow’s communication from the RBNZ will be the guidance offered for 2020. Given the constraints of household debt and the models of the banking system, there is a significant concern that the RBNZ may be reaching the lower floor for interest rates. Any acknowledgment of this, however, could lessen any downward pressure on the NZD from a policy move.”