WHAT TO EXPECT OF WEDNESDAY RBNZ MEETING

Thursday’s RBNZ Monetary Policy Statement will not be as firm as the one it issued in September. This we know from the Bank’s softer-than-expected OCR commentary in late October. Since then, the near-term outlook for the CPI has been carved further to the bone by plunging fuel prices. And the pall surrounding the dairy sector has really set in. Even so, the more general economic pointers have improved over the last month or two, to be consistent with GDP growth picking up to an above-trend pace.

Meanwhile, immigration is screaming higher and the housing market looks to be heating up again, post September’s election. And so, when we look at everything, we don’t believe the Reserve Bank can presume the OCR tightening cycle is over this early in the piece (as the markets seem to be sniffing for, encouraged, as they seem to be, by the softening view around Australia at the moment).

Instead the RBNZ will probably retain something of a tightening bias in its 90-day bank bill projections and language this week, albeit with a sense that the foreseeable future has become even more mixed. Recall that the September MPS suggested resumption in the tightening phase around mid-2015 and an OCR of around 4.50% (neutral?) by late 2016/early 2017.

Thursday’s MPS could well signal a delayed start, to, say, late-2015, while pruning the top down to 4.25%. The market will probably do its best to look through this, but won’t be able to ignore the Bank’s longer-term intent entirely. Indeed, it’s another reason why the RBNZ should hold the line this week. Otherwise, fixed rate mortgages rates will continue to drop to levels below those that prevailed at the start of the Bank’s initial OCR tightening phase of 100bps. It’s been a Clayton’s tightening in this respect.