Slow growth worries

ANZ and BNZ economists are among those who believe the RBNZ should pay attention to the fact the economy is failing to fire and businesses are worried about their lack of sales.

However, the economists are mindful that Acting Governor Christian Hawkesby surprised, if not confused, observers in May by saying the committee would have no bias coming into Wednesday’s meeting.

One of the committee’s six members did not want to cut the OCR in May, preferring to “consolidate inflation expectations around the target mid-point, and guard against the risk of higher-than expected inflation from the supply-side effects of increased tariffs”.

“That person won’t be any more likely to vote for a cut this time around and may even have a few extra friends in the camp,” BNZ’s head of research Stephen Toplis said.

He noted economic growth surpassed the RBNZ’s expectations in the first three months of the year and business surveys suggested growth would pick up.

There is also more talk about trade wars being inflationary.

And Toplis believed US President Donald Trump’s 90-day “pause” on tariffs expiring less than 24 hours after the RBNZ’s announcement might give the committee further reason to hold fire.

“Uncertainty still reigns,” Toplis said.

But he still wanted the committee to cut the OCR, noting a number of weak spots in the economy.

He saw New Zealand commodity export prices easing.

“This will seriously curtail some of the food price increases that have been driving inflation higher over the last few months. A lack of global demand may also drive other commodity prices lower, including oil,” Toplis said.

He noted the labour market remained weak, as did electronic card transactions, immigration, house prices, business pricing intentions and manufacturing activity.

Nonetheless, Toplis saw the RBNZ only cutting the OCR again in August and then October.

ANZ chief economist Sharon Zollner tentatively pencilled in an additional cut, to take the OCR to 2.5%, for in the new year.

Like JB Drax Honoré chief strategist for Asia Pacific, Sean Keane, she believed traders in financial markets were underestimating the likelihood of an OCR reduction on Wednesday.

She believed there was about a 40% chance of the committee cutting, even though data published since May “easily” justified a cut.

Keane was of the view that the longer the RBNZ took to get the OCR below 3%, the more likely it was for it to end up closer to 2.5%.

Inflationary pressures

Westpac chief economist Kelly Eckhold had a completely different view, going so far as to suggest the RBNZ may not need to lower the OCR any more at all.

He believed the RBNZ would “note the uncomfortably high near-term inflation outlook and upweight this factor relative to more recent indicators of weaker economic momentum”.

He also believed the global economic outlook had improved since May.

“Progress has been made on trade deals such that the risks of very high and retaliatory tariffs look lower. Progress has been made in reducing risks to global security now Middle East tensions have reduced,” Eckhold said.

“Global equity markets are at record highs. Consensus forecasts for global growth have increased in the last six weeks – although these remain lower than forecasts seen before April.”

While Toplis believed the high commodity prices New Zealand exporters were benefiting from would abate, Eckhold believed that coupled with the current level of interest rates, they would translate to “above-trend growth” over time.

“This should be especially evident as global uncertainties continue to recede,” he said.

Eckhold accordingly believed the RBNZ would maintain its easing bias on Wednesday, but remain non-committal on when it would next cut the OCR.

The committee will only release a short statement and meeting minutes on Wednesday.

The RBNZ will update its forecasts and release its more detailed quarterly Monetary Policy Statement in August, when there will be a routine press conference, and committee members will do media interviews and appear before a parliamentary select committee.

Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.