OCR hold right call – for now

The Reserve Bank today left the OCR unchanged at its record low of 2.25% - despite weeks of speculation that ongoing low inflation might force its hand.

In the accompanying announcement, Reserve Bank Governor Graeme Wheeler acknowledged a deterioration in global growth accommodative monetary conditions internationally.

He also said the New Zealand remains too high and that there are renewed pressures in the housing market.

But it seems that inflation could, ultimately, trump those pressures as Wheeler concluded that further policy easing may be required.

Economists were not surprised by the Reserve Bank’s decision, with several noting that it had always been a finely balanced call.

ASB senior economist Jane Turner said it had been their baseline case that the Reserve Bank wouldn’t cut the OCR at this point.

“We do expect a further cut to the OCR, as was signalled by the Reserve Bank in their last Monetary Policy Statement (MPS). We believe June is the most appropriate time for that.”

However, there was no sense of urgency in the Reserve Bank’s statement today, as compared to their previous statement, she said.

“We think they are reluctant to cut lower than 2% at this point. But we see downside risks to inflation and we believe the Reserve Bank will end up having to cut the OCR to 1.75%.”
Westpac senior economist Michael Gordon said they was sticking to their core case that there is a further OCR cut to come.

The Reserve Bank’s language showed an easing bias – although not a particularly strong one, he said.

“The guidance on further rate cuts was less emphatic than we were expecting. I think the market was looking for a stronger signal, but the Reserve Bank clearly doesn’t want to give one.”

Westpac had expected a stronger easing bias from today's statement, Gordon said.
This was based on the high New Zealand dollar and the fact that higher bank funding costs meant the March OCR cut wasn't fully passed through into mortgage rates.

“But the language on the New Zealand dollar in today's statement was no firmer than it was in March, and mortgage rates were conspicuous by their absence.”
The Reserve Bank was keeping their cards close to their chest, ANZ chief economist Cameron Bagrie agreed.

He said the decision to hold the OCR at 2.25% and retain an easing bias was consistent with ANZ’s expectations.

“At the margin, the tone of the statement was a touch less dovish than in March, although to be fair it was difficult for it not to be.”

But the Reserve Bank’s caution over global prospects, concern over lower inflation expectations and more direct language about the currency meant there was enough in the statement to keep the doves happy, he said.
ANZ continues to forecast a June cut to the OCR, but Bagrie said they see this as very much a line-ball call – although reasons for cutting do exist.

“But when weighed against a domestic economy that is still operating near trend, evidence core inflation is stabilising and capacity pressures intensifying, re-leveraging behaviour evident and housing markets booming, we remain of the view that additional easing may not be in the best interests of the economy.”