RBNZ March MPS tomorrow

The Reserve Bank will decide how much to cut interest rates tomorrow.

The market is currently expecting between a 50bp and a 75bp cut. However, there is still potential for a 100bp cut if the Bank downgrades their growth forecast sufficiently.

Ultimately, it will all be about the Bank’s forecast growth. In normal circumstances we might say that an OCR of 6% to 6.5% is neutral – however, we are expecting a period of sub-trend growth, a faltering credit market, and downward pressure on prices from overseas. In such an environment neutral could be substantially lower.

If the Bank now expects low growth to be substantially more persistent then I would expect a larger cut. Forget about “keeping bullets in the barrel” the Bank will want to get us sufficiently under neutral as soon as possible. If the Bank still expects a bounce back in growth (even following a sharp fall), then given the lags associated with monetary policy I would expect a relatively short cut.

As a result, in my opinion tomorrow’s decision will rest on the Bank’s “mediumish” term outlook (2-5 years). We will see I guess 😛

5 replies
  1. goonix
    goonix says:

    iPredict currently: 50 at 46%, 75 at 24%, 100 at 26%. I’m a little surprised that a 75 point cut is the lowest of those three options but I won’t take a position on it.

  2. Matt Nolan
    Matt Nolan says:

    I agree goonix – I think there is a cognitive bias against 75. However, with all the uncertainty in the air I don’t have the stomach to go around betting on the interest rate stocks

  3. CPW
    CPW says:

    The unpopularity of 75 was there in the last economist poll too: 4 were picking 100, 1 75, and 10 for 50.

  4. Matt Nolan
    Matt Nolan says:


    Indeed I saw that. There has been a couple of other polls where the spread wasn’t that extreme – but it still existed.

    For some reason 75 just doesn’t feel right – it takes us to 2.75% which just doesn’t feel right either. It is very interesting. I’ve heard that the anti-75 bias stems from the fact that Bank has never done 75 …

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