Reserve Bank signals more OCR cuts

The Reserve Bank’s statement indicated its concern over the impact of a range of factors on the economy.

These factors included ongoing low inflation expectations, the high New Zealand dollar and global uncertainties.

However, it is the high New Zealand dollar which was a particular concern.

The Reserve Bank said the high exchange rate is adding further pressure to the dairy and manufacturing sectors and, together with weak global inflation, is holding down tradable goods inflation.

“This makes it difficult for the Bank to meet its inflation objective.  A decline in the exchange rate is needed.”

Since the June monetary policy statement, the stronger exchange rate implies that the outlook for inflation has weakened, the Reserve Bank said.

For this reason, the Reserve Bank’s monetary policy will continue to be accommodative.

“At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range.”

Economists believe the Reserve Bank’s statement signalled further cuts to the OCR.

ASB senior economist Jane Turner said the Reserve Bank had strengthened its easing bias and also made very strong comments about the strength of the exchange rate.

It said the high New Zealand dollar “makes it difficult for the Bank to meet its inflation objective and stated a decline in the exchange rate is needed, she said.

“This suggests the Reserve Bank has opened the door to OCR cuts below 2%, a move it had previously indicated a very high threshold for doing so.”

Turner said this week’s announcement that LVR restrictions will be tightened should help the Reserve Bank’s reluctance to cut interest rates further.

“The Reserve Bank’s statement reinforces our view that it will cut the OCR to 2.0% in August, then cut again to 1.75% in November.”

Westpac acting chief economist Michael Gordon agreed that an OCR cut in August appears to be on the cards.

The Reserve Bank’s statement made it clear that the strong New Zealand dollar is undermining the outlook for inflation, and that another OCR cut at the 11 August Monetary Policy Statement is likely, he said.

“We have maintained the view that the OCR would be cut to 2% in August, and today's statement seals the case.

“It also seems likely that the August MPS will leave the door open to further interest rate cuts if the currency remains elevated.”

While the statement noted house price inflation remains excessive, its only other comment on the housing market was that the Reserve Bank is consulting on new macro-prudential measures, Gordon said.

“Recent statements by the Reserve Bank had left the market with the mistaken impression that the strong housing market could prevent interest rates being eased further.

“Today's statement was clearly arranged to dispel that view, and to reassert that meeting the inflation target remains the Reserve Bank’s primary duty.”

Following the Reserve Bank’s statement, the New Zealand dollar fell by 65pts to 0.6960.