ASB’s hold call, set against many banks expecting a hike, underscores just how close market pricing suggests Wednesday’s decision will be, with the bank explicitly acknowledging the market disagrees with its own view. For positioning purposes, ASB argues the practical stakes of a hold versus a hike this week are limited mostly to trading floors and offshore fund managers rather than the underlying policy trajectory, since the bank still expects at least partial removal of monetary stimulus later this year regardless of Wednesday’s outcome. That framing suggests NZD and rate markets could see a sharp reaction to the decision itself without it necessarily altering the medium-term tightening path priced further out the curve.

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ASB expects the RBNZ to hold the OCR at 2.25% on July 8 rather than hike, arguing the retreat in oil prices buys time to diagnose the shock, even as it agrees rates are still likely to rise later this year.

Earlier:

Summary:

• ASB expects the RBNZ to hold the OCR at 2.25% at Wednesday’s Monetary Policy Review, putting it at odds with other Big 4 banks expecting a 25bp hike
• The bank argues the recent retracement in oil prices buys the RBNZ time to properly diagnose the shock rather than act under continued uncertainty
• ASB says the trade-off of waiting for more information is not material, and that Governor Anna Breman would need to confirm a hike without clear medium-term indicators, which it sees as inconsistent with her previously cautious stance
• The bank invokes former Governor Adrian Orr’s description of policymaking during a shock as “jumping at a crocodile in a dimly lit room,” warning against the Committee jumping at shadows
• ASB says the data received since the May MPS has not shifted enough to push previously hold-leaning committee members toward voting for a hike
• The bank still expects some removal of monetary stimulus later this year and says market pricing currently disagrees with its hold call, acknowledging it is a close decision

ASB expects the Reserve Bank of New Zealand to hold the Official Cash Rate at 2.25% at Wednesday’s Monetary Policy Review, putting it at odds with other banks that expect the central bank to raise rates by 25 basis points, according to ASB.

The bank argues that navigating an oil price shock under significant uncertainty requires time to properly diagnose, and that the recent retracement in oil prices gives the RBNZ room to use that time rather than act now. ASB said the trade-off of waiting a little longer for considerably more information is not material in its view, and that even if it were, Governor Anna Breman would need to confirm a hike without clear medium-term indicators in hand, something the bank sees as inconsistent with her cautious tone in previous media appearances.

Drawing on a description once used by former Governor Adrian Orr, who likened policymaking during an economic shock to jumping at a crocodile in a dimly lit room, ASB said the Committee must be wary of jumping at shadows during uncertain times. The bank said that of the partial and geopolitical data received since the May Monetary Policy Statement, none of it has developed in a way likely to push committee members who previously favoured holding toward voting for a hike. ASB acknowledged there may well be an inflation crocodile in the room, and that it still believes monetary stimulus should be removed, at least in part, later this year. But it argues Governor Breman will want to see the crocodile’s teeth first, with very little clear information on either inflation or activity available to the Committee before Wednesday’s decision.

ASB conceded that market pricing currently disagrees with its call and that the decision is a close one. The bank said whether the RBNZ hikes this week or waits eight weeks matters more for bank trading floors and offshore fund managers than for households, for whom the key takeaway is simply that interest rates are likely to move higher over the course of the year regardless of the timing of Wednesday’s decision.