Thu, 1 Aug 2002
Data Flash (New Zealand)
RBNZ expected to leave OCR unchanged
The market is currently pricing a near zero probability of a RBNZ rate hike in August. While it looks increasingly
likely that the Bank will validate that view, we believe that the decision will be far less straightforward than current
market pricing suggests.
The last RBNZ statement on 3 July foreshadowed further rate hikes despite the significant appreciation of the NZ dollar
at that point. While the global growth outlook has deteriorated since then, the NZ dollar has weakened again by around
4%. Furthermore, domestic data - while clearly pointing to a slowdown in growth - have not been out of line with the
RBNZ's May forecasts. That suggests that the Bank will conclude that at least one more rate hike is appropriate at some
point during this cycle.
Past actions suggest that the RBNZ has an underlying preference of front-loading rate hikes. However, whether the next
tightening step will be in August depends on the perceived degree of uncertainty relating to the US equity market and
the implications for global growth. That factor has to be weighed up against the potential difficulties of tightening at
a later stage, which are related to the transition to a new Governor and increasing evidence of a slowing domestic
While US markets have recovered somewhat, uncertainty about US growth prospects remains and we believe that that should
be the overriding factor in the RBNZ's decision-making. Whether the Bank ultimately comes to that conclusion will most
likely depend on developments over the next two weeks. Signs of stabilisation in equity markets and continued NZ dollar
weakness suggest that it will be a close decision, but we now expect that the RBNZ will decide to stay on hold in
August. Moreover, given likely difficulties of re-commencing the tightening cycle at a later stage, our central scenario
now includes no further rate hikes during this cycle.