Spirit of caution in OCR call

Thursday 22 March 2018

Don’t expect interest rates to start rising anytime soon as the Reserve Bank’s decision to leave the OCR at 1.75% today makes it clear they remain on hold.

As expected, Reserve Bank Acting Governor Grant Spencer’s last statement contained no surprises, leaving the OCR on hold at its historic low and maintaining a neutral stance.

Spencer says monetary policy will remain accommodative for a considerable period as numerous uncertainties remain and policy may need to adjust accordingly.

Westpac chief economist Dominick Stephens says this guidance is the same as has been used, more or less unchanged, since February last year.

Spencer’s statement contained no indication that any of the recent economic data and developments have changed the Reserve Bank’s view, he says.

“For example, it acknowledged that GDP data was weaker than expected, but said it still expected the economy to strengthen.

“And it described house price inflation as ‘still moderate’ despite a run of slightly stronger housing data recently.”

That has led Westpac to conclude that the Reserve Bank still expects to leave the OCR on hold until mid- to late-2019.

ANZ chief economist Sharon Zollner agrees, saying that the Reserve Bank is treading carefully, while retaining a data-dependent stance.

In her view, the Reserve Bank has taken a cautiously upbeat stance which is positive on the growth outlook and downplays downside risks.

The Reserve Bank’s next move is expected to be a hike, but it is being careful to not give that signal prematurely, given the market’s tendency to pre-empt, she says.

“The February Monetary Policy Statement (MPS) made it clear that the Reserve Bank sees risks on both sides. We expect this broad spirit of cautiousness (particularly with regard to the inflation outlook) to continue for some time yet.”

ANZ does not expect the Reserve Bank to start tightening monetary policy until the second half of 2019.

For ASB chief economist Nick Tuffley, Spencer’s acknowledgement that capacity constraints may be impacting on residential construction was worth noting.

“The risk to the Reserve Bank’s construction outlook from capacity constraints was something we flagged on the release of the February MPS.”

Other than this, and an acknowledgement of weak near-term inflation, the statement was in line with what was expected and suggests little change in the Reserve Bank’s underlying outlook, he says.

“We continue to expect that the Reserve Bank will keep the OCR on hold until August 2019.”

But BNZ head of research Stephen Toplis took a different stance, saying they struggle with the Reserve Bank’s belief that rates can stay as low, for as long, as it currently projects.

That’s because planned rate hikes in the US mean New Zealand will be facing a more inflationary world, while New Zealand is also reaching its capacity constraints, notably in the housing market.

Toplis says this is one of the reasons they have taken a more aggressive stance on rates than the Reserve Bank has.

But he acknowledges the next set of inflation outcomes are likely to reinforce the Reserve Bank’s view that the cash rate can stay put for longer than BNZ have assumed.

“Accordingly, there is significant risk that we will need to postpone our forecast first rate increase from February 2019 to later in the year. But we won’t be rushing to do this as there is plenty of water to go under the bridge yet.”

The economists all indicate that it is the imminent release of the new Policy Targets Agreement (PTA), prior to new Reserve Bank Governor Adrian Orr starting on March 27, that is now of most interest on the monetary policy front.

Read more:

What the RBNZ Governor said today 

OCR call takes backseat 

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