RBNZ preview: expecting to stay on hold - Westpac

Analysts at Westpac explained that they expect the RBNZ to remain on hold at 1.75% at Thursday’s OCR Review, and to repeat the message it expects to remain so for a long time. 

Key Quotes:

"Markets should be unmoved.In its February MPS, the RBNZ left the OCR unchanged and pointedly moved away from an easing bias to a more neutral stance. And in a speech three weeks ago, the Governor reiterated that “we consider the risks evenly balanced in respect of the OCR”.
 
Is there any reason to expect a change in that assessment at Thursday’s OCR review? 

Given the absence of a full forecasting round, and the limits of what can be conveyed in a one-page statement, we suspect the message will be largely unchanged this time.

Our central scenario is defined by a balanced tone overall, with the policy message in the final paragraph unchanged. This outcome, to which we assign a 90% probability, would leave markets roughly unmoved. 

Our hawkish scenario (5% probability) has the RBNZ tilting the narrative towards the main positive developments since February: higher near-term inflation, the lower NZD, and global growth outlook. 

The market’s reaction to a hawkish surprise would be significant because it is already biased in this direction. A shift in pricing from March 2018 (currently) to November 2017 would result in the 2yr swap rate rising by 14bp, NZD/USD by around 1.5c. 

Our dovish scenario (5% probability) has the RBNZ tilting the narrative the other way, noting slower GDP growth, cooler housing, lower dairy prices, and geopolitical risks. The market’s reaction would be sceptical and modest. If pricing shifts to only a 15% chance of November, 2yr swap rate would fall by 5bp, NZD/USD by around 0.5c."