OCR review preview: a surprise cash rate cut in the US

Tomorrow will see the Reserve Bank decide whether to lift the official cash rate.  Pushing them towards lifting rates will be a high CPI reading (although non-tradables was weaker than expected), the strong inflationary pressures illustrated in NZIERs quarterly survey of business opinion, and the fact that inflation expectations are threatening to become entrenched at high levels.  Possibly preventing them from hiking will be a weakening housing market, the potential for slowing world economic growth, and today’s shock inter-meeting cut by the Fed.

Today’s cut by the Fed is especially important, as it will help put upward pressure on the New Zealand dollar, at a time when it looked like it was easing.  This will, at least in the short term, give the Bank some room to breath in terms of tradable inflation.

Overall, the Reserve Bank seem unlikely to lift rates tomorrow.  However, the market still expects a hawkish tone from the Bank, if they don’t get this expect some renewed downward pressure on the dollar.