OCR held, but for how long?

Thursday 22 June 2017

Watchful caution is guiding the Reserve Bank’s policy so it will need strong evidence before it makes any change to the OCR, economists say in response to this morning’s OCR call.

By Miriam Bell

The Reserve Bank left the OCR at its record low of 1.75% today, while sticking to a determinedly neutral tone in its announcement.

Economists were not surprised by the Reserve Bank’s announcement and pointed out that the tone echoed that used in its last in the monetary policy statement.

ASB senior economist Jane Turner said the tone of the statement was largely unchanged except where it acknowledged recent economic developments.

“In particular, the Reserve Bank acknowledged the weaker GDP outcome, but remains upbeat on the growth outlook.

“It added the high Terms of Trade and the Budget 2017 as drivers which would support growth going forward. It also acknowledged the recent fall in energy prices and the lift in the NZD.”

There were some tweaks in language, but the message and tone of the announcement took a similar, neutral tone to that used in May, ANZ chief economist Cameron Bagrie agreed.

It was important, but unsurprising, that the Reserve Bank reiterated that “monetary policy will remain accommodative” for some time, he said.

There are a number of moving parts to the equation, such as the housing market and inflation but, overall, caution appears to prevail for the Reserve Bank.

Bagrie said they are left with the clear impression that the hurdle for policy action - in either direction - remains high.

“The Reserve Bank continues to see ‘numerous uncertainties’ shaping the outlook and is hesitant to act, or to even signal likely future action. And we suspect that will remain the case for a while yet.

“Most importantly, we doubt the Reserve Bank will be ready to embrace a tightening mind-set until there are clearer signs that domestic inflation is broadening beyond just housing.”

He added that, in ANZ’s view, the Reserve Bank is likely to start tightening the OCR next year, given their belief that the economy will grow at a rate which will gradually eat into capacity.

“However, the Reserve Bank is some way away from embracing that mind-set. It will not react until it sees broad-based inflation.”

ASB and ANZ both expect the OCR to stay on hold at 1.75% until mid to late 2018.

Westpac acting chief economist Michael Gordon said they think that the OCR will remain on hold through 2017 and 2018.

But he said that the Reserve Bank forecast in May was that the OCR would remain unchanged until late 2019 and today’s assessment of economic conditions was largely unchanged from May.

“While inflation is currently around 2%, much of its recent rise is a result of temporary factors.

“The Reserve Bank needs to keep rates low to ensure sustained strength in domestic activity and a rise in underlying inflation pressures back to levels of around 2%.”

Although the Reserve Bank warned there was a risk of resurgent house price inflation, Gordon said the continued creep higher in borrowing rates is likely to keep house prices low for some time.

Read more:

OCR held again – here’s what the RBNZ had to say

Verdict in on this week’s OCR call

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