OCR to be kept at an ‘expansionary level for a considerable period’, with the RBNZ Governor sticking to his line that the next move could be ‘up or down’

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Ardian Orr cartoon by Jacky Carpenter

The Reserve Bank has kept the Official Cash Rate at 1.75% as expected, reiterating it will remain at this level “through 2019 and into 2020”. 

Governor Adrian Orr has also maintained his position that the next move could be up or down. 

Economists regard his “neutral” stance as little changed from the last OCR review in August.

Here is Orr’s statement:

“We expect to keep the OCR at this level through 2019 and into 2020. The direction of our next OCR move could be up or down.

“Employment is around its sustainable level and consumer price inflation remains below the 2 percent mid-point of our target, necessitating continued supportive monetary policy. Our outlook for the OCR assumes the pace of growth will pick up over the coming year, assisting inflation to return to the target mid-point.

“Our projection for the New Zealand economy, as detailed in the August Monetary Policy Statement, is little changed. While GDP growth in the June quarter was stronger than we had anticipated, downside risks to the growth outlook remain.

“Robust global economic growth and a lower New Zealand dollar exchange rate is expected to support demand for our exports. Global inflationary pressure is expected to rise, but remain modest. Trade tensions remain in some major economies, increasing the risk that ongoing increases in trade barriers could undermine global growth. Domestically, ongoing spending and investment, by both households and government, is expected to support growth.

“There are welcome early signs of core inflation rising towards the mid-point of the target. Higher fuel prices are likely to boost inflation in the near term, but we will look through this volatility as appropriate. Consumer price inflation is expected to gradually rise to our 2 percent annual target as capacity pressures bite.

“We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.”

The OCR has been at 1.75% since November 2016.

Gap between NZ/US benchmark rates the widest ever 

Meanwhile the Federal Reserve on Thursday morning (NZ time) hiked its benchmark rate for the third time in 2018. At 2.25%, its rate is 50 points above that of New Zealand. This is the largest difference ever. 

The New Zealand dollar spiked a little against the US on the Fed’s news, before retreating and then jumping briefly on the RBNZ’s announcement. 

The movements were all minor; ANZ economists Sharon Zollner and Liz Kendall saying the review “appears to have been successfully geared to generate little market reaction”.

The NZD remains relatively weak in the bigger scheme of things, sitting at 66.6 USc at 9.45am. 

Orr wouldn’t risk coming out less dovish or more hawkish

Kiwibank economists Jarrod Kerr and Jeremy Couchman have described the RBNZ’s statement: “as unchanged as unchanged gets on an unchanged day”.

“The RBNZ’s statement gave a little, then took a little, but reaffirmed us of the current OCR trajectory,” they say.

“To everyone in New Zealand, and those trading Kiwi instruments internationally, the cash rate is going nowhere for two years. The message is clear. And the message is consistent.

“Yes, we have seen an upside surprise in the (old) 2Q GDP numbers. Yes, business confidence has bounced back a bit, after seemingly voting no-confidence in Government policy directives. And yes, the US and Global economy hasn’t imploded under Trump’s tit-for-tat tariff tirade (alliteration at its best).

“But risks remain.

“The RBNZ Governor would not risk coming out less dovish, or more hawkish – pick a bird, basically more upbeat. Because Orr knows better than most, that a slight tilted change to the upside would have sent interest rates (expectations) higher, and the Kiwi flyer higher.

“We don’t need higher interest rates yet, and we don’t want higher exchange rates yet, either.

“Accommodative the RBNZ are, and accommodative the RBNZ will stay, well into 2019.”

Will inflation pressures hit sooner than the RBNZ expects?

ASB chief economist Nick Tuffley retains his view that inflation pressures will pick up sooner than the RBNZ has been forecasting. 

“In particular, we expect a greater degree of wage inflation and subsequent flow-through to consumer prices. That is why we expect that when the OCR eventually rises, it will occur sooner than the late-2020 indication from the RBNZ,” he says. 

“But the near-term risks are skewed still towards a lower OCR, primarily if growth does not live up to RBNZ expectations. 

“Although the RBNZ will have been pleasantly surprised by the strength of Q2 GDP, continued soggy business confidence will keep it wary about the growth performance for the rest of 2018 – particularly the tail end of the year.”

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