RBNZ OCR 12 March Stocks

What will the Reserve Bank do on 12 March?

Covers stocks OCR.100.12MAR, OCR.75.12MAR, OCR.50.12MAR, OCR.25.12MAR, and OCR.OTHER.12MAR.

It seems screwy that, at the time of writing, a cut of 100 basis points is at 37c, and 50 basis points is at 26c, but a 75 point cut (which might be seen to be a happy medium) is at just 18c.

Does the RBNZ generally favour cuts in multiples of 50 basis points?

Disclaimer: I am long 250 on a 75 point cut.

No reason why they could not do 75bps, but it is a slightly odd number. Banks normally move in 25 or 50bp licks, unless in emergency mode. If you think emergency cuts are over now that rates are at an historic low, as I do, then 25 or 50 is the most likely option. I think the 100s are an outstanding sell, so much so that I've built up a short of just over 2000. I'm pretty long the 25s and 50s too. No position in the 75s. Will hold this until closer to the meeting and then decide whether to cut the 25s or 50s.

Decent sell-off in financial markets over the last few days both in Australia and NZ. As far as the RBNZ is concerned, markets are now roughly 50/50 split between a 50bps and 75bps rate cut at the March meeting. I suspect that pricing will come down further if the consensus builds in favour of the RBA sitting on the sidelines early next month. Ipredict seems to be headed towards this conclusion also. I remain short 100bp and long both 25bp and 50bp contracts.

A Reuters poll of 14 economists published today puts the median probabilities for the 12 March meeting as follows

-25bps - 5%
-50bps - 48%
-75bps - 23%
-100bps - 20%
- Other - 4%

So after the moves over the past couple of days the Ipredict market is actually not too far out of line, just a bit more to come out of -100bps and Other and reallocated into the 50bps bucket.

The RBA has moved 75 points on more than one occasion but, to the best of my knowledge the RBNZ has never moved 75 points. So, perhaps now is the time to break the pattern. After all they broke the pattern a bit in December.

Last month 50bps and 75bps were the favorites early on. Its been the same way for the last three cuts. As the months progress leading up to the cut the news gets worse and worse, as everyone realizes nothing has actually improved. With 70-80% of people being on fixed term mortgages its easy to see why. Inter bank lending its still not as it should be, economic data coming out of other countries indicates we still are not at the bottom. I'm favoring a 100bps cut.

This pattern should be quite familiar.

100 point cut and I start worrying about a currency collapse and tradeables inflation going through the roof.

That said, the prices of the inflation securities are all under 3% now, so the rest of the market thinks I'm wrong there.

Isn't it expected that the OCR will bottom out at 2.25-2.5%?

The MO of our RB is aggressive as hell. If it doesn't drop by 100 pts this time around it would be a change in behaviour very inconsistent with the last 150 drop.

What has changed since it dropped by 150? the dollar has returned to it's old time groove of US50c but inflation has settled.

Otherwise? there's still no end in sight, and in this climate an OCR of 2.5 is hardly low.

A drop of 50 pts would be pretty strange.

Somewhere in my university days I seem to remember reading something about monetary policy operating with long and variable lags, You could cut the OCR to zero tomorrow and the economic data will still look poor for a while so data is irrelevant. The question is are the conditions in place for some sort of recovery down the track? Sub 6% mortgage rates, a low exchange rate and one of the most aggressively expansionary fiscal policies seen anywhere in the world would suggest that the answerr is probably "yes". I'm also conscious that super low interest rates in the US, encouraging unsustainable economic activity, got the US and thus the world, into this mess in the first place. I sure hope that we've learned some lessons along the way! I can see a case for another 50pts off the OCR. I certainly don't see any reason why the 150bp move last time will have much bearing on this move (else extending the logic we will be down to 0.5% in April). Policy needs to pause and take stock at some point. Thus market pricing looks broadly fair to me based on the information we have today, but I agree that it is easier to see bad news rather than good news over the next month.

According to ANZ and ASB market data released this week, the Market is pricing in about a 70-80bps cut for 12 March, with ASB predicting this will increase to 100bps by the time of the announcement due to a higher unemployment rate. I tend to agree with there views that the market outlook is likely to keep deteriorating and that the RBNZ has llittle to loose by cutting rates hard and fast down to a terminal point of 200bps, therefore my prediction is for a 100bps cut come 12 March, and a further 50bps at the next meeting.

The market is actually pricing 68bps today, so the choice seems to be between 50-75bps based on information at present. If the newsflow gets worse, that will go up, if the newsflow improves it will go down. I suspect the mkt (and this the RBNZ) will be strongly guided by whatever the RBA does early next month - the mkt is leaning towards -50bps there, helped by an unexpected rise in employment reported today (shades of the NZ data last week).

ASB Economic Note 13/02/09:
"We continue to expect the OCR will eventually drop to 2%. In our view the global news remains sobering enough to warrant a 100bp cut in March, though there is a risk the RBNZ does opt for a smaller cut at that meeting. Domestic news since the RBNZ cut the OCR in January has generally been close to expectations (with the exception of Q4’s eyebrow-raising lift in employment). However, the sheer pace at which other economies continue to shrink in the here and now remains disquieting, as do the eventual implications for NZ’s economy. With that in mind, we still think the swifter the OCR falls the better." - ASB Economist Nick Tuffy

Take it how you will....

For what it is worth there has been litte change in financial market pricing last couple of weeks. Markets still factor 68bps of rate cuts.

Given the market favours a 68 point cut, it seems very surprising to me that OCR.75 remains at 24%. I can't see Allan Bollard avoiding making a 75 point cut because it is a "strange" number. The bank tends to operate by making cuts in multiples of 25 points. And the RBA made a 75 point cut only a few months ago, after all!

The market seems to be fully pricing in a 75bps cut on march 12, there is a lot of market data to be released between now and the announcement, much of which I expect will be relatively bad news, and which may push the market closer to the 100bps mark, but whether or not the RBNZ will be pushed by the market into another large cut again remains to be seen.

Of interest this week will be the RBNZ survey of expectations this Wednesday, and also the NBNZ business outlook survey on Thursday, these should hopefully give us some hard evidence on where the economy is heading in the short to medium term.

Article in Scoop from JP Morgan about a big drop in business confidence this month, has caused them to re-evaluate their prediction for the march 12 OCR cut to 100bps.

[www.scoop.co.nz]

The RBNZ decision will come down to what the RBA chooses to do on 3rd March. The RB will not want the OCR to be much lower than Australia's or the NZDAUD will be thrashed and NZ could lose significant overseas investment. The market has begun pricing in a slight dip (25bp) below that of the Aussie OCR but nothing more. If the RBA go for no change it is unlikely the RBNZ will do anything over 50bp

What I really don't understand is how RBA75 is so high, they've stated an end to aggressive easing and that makes me think anything over 50 is out of the question. Likewise with a constrained move over the Tasman the RBNZ wont go over 100. In accordance with this I'm shorting RBA.75s and RBNZ.OTHERs.

And key Australian financial media this weekend seem to be playing up the possibility of an RBA pause - looks likely they have been worded up again (the RBA often works through the media to condition expectations, unlike the RBNZ). Mkt was only pricing 40bps of RBA easing on Friday so RBA won't be doing more than 50bps.So yes, counts against a big RBNZ move. As you say, who is going to lend money to NZ at interest rates less than they get get in Aussie??? Also the relative resilience of the Aussie economy - obviously important to NZ - should not have gone unnoticed.

Latest Comments by those more knowledgable than I, seems like Bollard welcomes lower exchange rates even against the aussie, either 75bps or 100bps at the outside looks favourite. 75 would keep some parity with the aussie but thats probably not important in the short term.

[www.dailyfx.com]
[www.stuff.co.nz]

Latest:-
[www.scoop.co.nz]

No change from RBA today, RBNZ now 75bp at most

if they go anymore than 25 you would start getting worried about the exchange rate. Completly wipes out the posibility of 100 (yes my money is where my mouth is).

I agree Rocketman. I think we can still go 50 though, as people will expect the RBA to cut rates by 25 at their next meeting in early April to even the gap back up. But there is no way NZ rates are going 75pts through Aussie this month, so the 100 contract should collapse down to 5% chance or lower I would have thought. Can't rule out 75 still though. NZ financial markets are back to pricing abouts 65bps for the meeting ie a toss-up between 50 and 75 but I suspect this will go a little lower tomorrow as people digest the RBA's decision.

To right, I didn't mean they wouldn't go more than 25, I think 50 is more likely but 25 basis points is a real posibility considering what the futures curve was pricing for Aus.

I bought over 600 25s this morning when it was at 2-3 cents in anticipation of an RBA pause - figured it was safer than actually buying 'RBA no changes'.

I do think the 100 is still way over-priced (also shorted 300 of these in the mid 30's), fair value 5-10% max.

Reading the statement, it sounded like the RBA may cut next time, but not enought sentiment to justfy a big interest rate differential over the next few weeks.

Somebody is giving away $200 (1000 on the bid at 0.20 for 100bps rate cut). Unfortunately I'm maxed out so can't take advantage of it.

I might also add that the 0.08 price for "other" is ridiculous. There is no way the RBNZ is going more than 100bps and virtually no chance of them going zero like the RBA. At the very least they are going 25 (and thus 25 should be priced much higher than other).

I'm getting hammered here betting against a 100bp cut. Do ya'll know something I don't?

How can you possibly be getting hammered? The stock has moved 20pts lower today post RBA. And there is still 20pts to go.