No surprises in Reserve Bank’s OCR decision

However, economists have offered up slightly differing interpretations of Reserve Bank Governor Graeme Wheeler’s comments on cutting the OCR.

Wheeler said it would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target.

ASB chief economist Nick Tuffley said the RBNZ’s statement was a bit more explicit that it has adopted an easing bias – as indicated in Assistant Governor John McDermott’s speech last week.

“We think that the odds of a rate cut this year have increased to about a 50/50 chance. We don’t explicitly think there will be a cut, but it is finely balanced in terms of inflation issues. The RBNZ is clearly nervous about traded inflation.”

Westpac chief economist Dominick Stephens also said the RBNZ had adopted a conditional easing bias.

But he interpreted Wheeler’s comments to mean the RBNZ was keeping its central OCR outlook "on hold" as it did not believe it was currently appropriate to lower the OCR.

Stephens emphasised the highly conditional nature of the RBNZ's easing bias, whereby the OCR will be cut only if demand weakens and inflation expectations settle below the inflation target.

“These are high hurdles to a cut. Domestic demand is currently very strong indeed, and is showing no sign of weakening. Furthermore, verifying that inflation expectations have settled below the inflation target would require quite some time.”

In his view, the statement was confirmation of an important shift away from the RBNZ's last policy guidance sentence, which was strictly neutral about the likely direction of the next change in the OCR.

He added that Westpac thought the OCR is likely to remain on hold for quite some time – although they believed there was a 40% chance of at least two OCR cuts, depending on what happens with inflation expectations.

“If cuts were to occur, they would occur very late in the year, because only then can the RBNZ verify that inflation expectations have fallen, and only then will the RBNZ have new mortgage restrictions on landlords in place to help slow the housing market.”

ANZ chief economist Cameron Bagrie said that, while the RBNZ had provided the potential for more of an easing bias, he was not convinced that they had given an outright easing bias.

“It is just a scenario. Wheeler said there might be a cut if demand weakens and if inflation expectations settle below target, but they also said that underlying inflation is expected to pick up. That seems to be their core scenario.”

In his view, while the RBNZ might now have an "easier" bias, it was not an easing bias.

Meanwhile, despite ongoing speculation about the RBNZ’s concerns regarding the Auckland housing market, Wheeler merely touched on the issue in his statement.

He said that house price inflation is elevated in Auckland.

Tuffley said that, from an inflation point of view, Auckland’s housing market took a back seat.

“The house prices are a worry in terms of financial stability, but the RBNZ is not going to use the OCR to try and deal with the issue.” 

Stephens noted that the RBNZ had described house price inflation in Auckland as "elevated", rather than "strong".

“That is an upgrade, but rather a mild one in our view.”

Read the full text of the RBNZ's statement here.