Mood shifting towards rates hold

it is now looking like a line-ball call with many economists picking Governor Graeme Wheeler will hold fire. Photo /Mark Mitchell

Market prices are in 75 per cent likelihood of no OCR cut with domestic economy is solid and global outlook is improving.

After weeks of strong odds on a rate cut at Thursday's Reserve Bank monetary policy statement, it is now looking like a line-ball call with many economists picking Governor Graeme Wheeler will hold fire.

Economists at ANZ, Westpac, First NZ Capital and Deutsche Bank think the official cash rate will be left at 2.25 per cent - although they all pick at least one further cut is likely this year.

ASB and Australian-based Capital Economics are picking a cut on Thursday. Both also feel the Reserve Bank will need to cut twice this year to 1.75 per cent.

"Back in March, when the RBNZ cut rates to 2.25 per cent, it signalled that rates would fall to 2 per cent even if GDP growth picked up, inflation rebounded and the housing market stayed strong," says Capital Economics' chief economist for Australia and New Zealand, Paul Dales.

"With the economy having largely evolved as the [Reserve] Bank had expected, a cut to 2 per cent in June is all but certain."

But ASB's Nick Tuffley and Daniel Snowden are less emphatic, saying it is a toss-up for the Reserve Bank between lower inflation and tactical considerations.

They say they are "very marginally" leaning towards a cut but still expect to see inflation get weaker, pushing the OCR down to 1.75 per cent.

The swing towards rates staying on hold this week - something the market is now pricing in as a 75 per cent likelihood - has been driven by a combination of factors.

ANZ cites a solid domestic economy with the non-dairy agricultural sectors, tourism and construction strong.

Inflation is showing signs of stabilising as oil prices rise. The housing boom and credit growth remain strong, which the Reserve Bank won't want to encourage with another cut.

Perhaps most significantly, the global economic outlook has continued to improve and the US Federal Reserve is poised to lift rates again, which would put downward pressure on the Kiwi dollar and buy the Reserve Bank some breathing space.

The RBNZ has the luxury of another full monetary policy statement review in August, Deutsche Bank notes.

"Over the intervening period we will receive the Q1 GDP report, Q2 labour market reports, the Q2 CPI and the Q2 QSBO survey.

"And by August we will know whether the Fed has resumed policy tightening and whether the UK has voted to leave the EU, and how financial markets have responded to those decisions," writes chief economist Darren Gibbs.

Those favouring a June cut tend towards a more gloomy inflation outlook.

"Despite the March rate cut and some rebound in oil prices, there has been no lift in expectations," ASB notes. "In fact, The general trend in the range of inflation expectations measures the RBNZ monitors is down."