The Reserve Bank of New Zealand cut the OCR by 25 basis points in June and also signalled a possible follow-up cut at some point later in the year. The RBNZ was concerned that underlying inflation had drifted too low. Because the economy’s capacity to supply goods and services was greater than previously thought, there was little upward pressure on inflation in the pipeline.It is likely that significant further reductions in the OCR will be required in the months ahead. The RBNZ will certainly acknowledge the fall in the exchange rate, but it may stick to its description of the exchange rate as “unjustified and unsustainable”.Slumps in Fonterra’s Global Dairy Trade price index, that was the catalysts for further downside in April’s business, accompanied by poor domestic data forced the RBNZ’s hand for a rate cut of 0.25bps in June, down to 3.25%. It is suspected that the exchange rate has not fallen far enough – the RBNZ still has a lot of work to do to return inflation to two percent on average over the medium term. It now seems abundantly clear that the RBNZ will reduce the OCR further and faster than it signaled in the June Monetary Policy Statement. “We now expect the OCR to fall to 2.0% by the end of this year. There are better than even odds of a 50bps cut at some point during the year, for Thursday RBNZ will cut OCR by 25bps to 3.0% and will use strong language to describe the likelihood of further OCR cuts”, says Westpac IB in a report on Tuesday.Markets are pricing in a ‘close to 90% chance’ of another interest rate cut to 3% from 3.25% on Wed July 22. This expectation was the primary driver behind the kiwi dollar’s 4.5% plunge against Sterling last week to its weakest levels since Sept 2009. Sliding commodity prices and a Chinese economic slowdown could force the RBNZ to signal more future rate cuts in 2015. But a ‘cut and hold’ scenario on Thursday could allow the kiwi dollar to bounce back from recent selling pressure.The New Zealand dollar edged up 0.3 percent to $0.6589, but faced tough chart resistance around $0.6620. It rallied sharply on Monday after a plunge to a six-year low of $0.6498 last week left speculators very short of the currency.
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