OCR decision too close to call

Thursday's official cash rate decision will come down to whether the Reserve Bank is more concerned about house prices or currency.

ASB chief economist Nick Tuffley said at present, the debates around OCR cuts were about when and not if the central bank would cut.

Regarding when, the argument for a cut on Thursday was finely balanced. The dollar and housing were the main influences.

‘‘As a result, we will not be at all surprised if the Reserve Bank cuts in April. However, we judge the Reserve Bank will be persuaded by housing developments to hold fire until June.''

Whether there was a cut on Thursday was an ‘‘extremely close call'', he said.

Ultimately, the decision would come down to what concerned the bank the most - currency or housing.

So far, the trade-weighted index had averaged 72.6, higher than the Reserve Bank's forecast of 70.9.

High relative New Zealand interest rates, as well as underlying structural factors, were key reasons the dollar remained elevated, Mr Tuffley said.

The stronger-than-expected New Zealand dollar meant inflation now risked taking longer to return to the target band than the Reserve Bank expected in March and provided the strongest argument for a cut in April.

The complicating factor was recent data showing the Auckland market was reheating fast and the rest of the New Zealand market was increasing in pace at the same time, he said.

If the Reserve Bank cut the OCR to boost inflation, it risked stoking the housing market further.

If the central bank was more concerned about house price appreciation, it would keep interest rates on hold.

Waiting for June allowed the Reserve Bank to get a better picture of the developing trends in the housing market and gave it more time to address housing risks more formally in May's Financial Stability Review, Mr Tuffley said.

Westpac chief economist Dominick Stephens was not convinced the OCR would be cut on Thursday.

Based on its forecasts and communications in March, the Reserve Bank expected to deliver one more cut, probably in June.

Since March, economic data developments had been mostly inflation-positive, while financial market developments had been inflation-negative, he said.

The balance between the two did lean in favour of further OCR reductions.

Tactical considerations made the hurdle for an April OCR cut high.

‘‘We are not convinced this hurdle has been cleared, particularly considering the financial market developments driving the need to cut could prove fickle.

‘‘We therefore conclude that although the April OCR review is live, the bank is more likely to remain on hold.''

Westpac was assigning a 25% risk of a cut.

If the Reserve Bank did keep the OCR on hold while issuing some signal of cuts ahead, there would be little market reaction, Mr Stephens said.

Financial markets were pricing some risk the OCR would fall below 2% and would continue to do in the scenario Westpac considered most likely.

‘‘We believe the Reserve Bank will only cut if it has already decided it is going to have to drop the OCR below 2%. That would be a very important development and financial markets would react vigorously.''

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