ASB Economic Weekly: Start Me Up

This week we are back into a bit of uncertainty over what the Reserve Bank of New Zealand (RBNZ) will do this week.  It’s not about if it will cut the Official Cash Rate (OCR) but whether is it a pedestrian 25 basis point (bp) or more get-up-and-go 50bp.  We are in the 50bp camp, mainly because we think there is a growing risk the economic recovery will be too gradual to absorb spare capacity steadily.  That may seem like a fanciful thing to be thinking of when inflation in the short term is heading near 3%.  But it’s inflation next year and the year after that we are eyeing up, when inflation could end up sinking into the bottom half of the target band if the recovery gets more drawn out.

You can argue the toss either way, and market pricing is a bit in between at around 33bp priced for the meeting.  But the RBNZ’s previous forecasts showed a high likelihood of the OCR getting down to 2.5% by year end, and two Monetary Policy Committee members voted for a 50bp last time.  So, Let’s Get It [recovery] Started.