8 Jun 2015

Will Reserve Bank cut official cash rate?

9:40 am on 8 June 2015

Financial market analysts are divided on whether the Reserve Bank will cut the official cash rate on Thursday.

The New Zealand dollar has been falling steadily as the market bets the central bank will eventually cut rates from 3.5 percent to 3 percent this year.

Moves by the Reserve Bank and Government to tighten lending and tax rules in Auckland's overheated property market have also reinforced expectations that governor Graeme Wheeler will act.

Chief economist at ANZ Bank Cameron Bagrie is picking Mr Wheeler will move on Thursday, since inflation is falling well below 2 percent, the midpoint of the Reserve Bank's 1 to 3 percent target band.

"At the moment, they've got core inflation moving down, and at the same time we've got a very clearly deteriorating risk profile across the economy."

The New Zealand dollar has fallen 11 percent to 70.3 US cents, from 79 US cents, since the beginning of the year, partly due to the central bank raising the possibility that the next move might not be up.

Mr Bagrie said if Mr Wheeler did not cut on Thursday, the New Zealand dollar could rise sharply.

"You could see the NZ dollar three to four cents higher in the next month."

But BNZ head of research Stephen Toplis said there was little justification for the Reserve Bank to cut rates this week.

He said while inflation was too low, the housing market was getting out of control.

"If you've delivering statements saying you don't want the housing market to get over-extended, and then you cut rates at the same time, isn't that giving mixed messages?"

Mr Toplis expected the dollar and short term interest rates would rise if the central bank left the OCR on hold on Thursday but believed that will be shortlived.

"We're likely to see a resumption of a declining NZ dollar and a push towards lower interest rates generally."

A Reuters news agency poll has six out of 14 economists expecting cuts this year, while the remaining eight are expecting the next move will be up, but not until 2016 at the earliest.

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