OCR hike expectations premature

The Reserve Bank’s decision to leave the OCR on hold at 1.75% came as no surprise to economists.

But the bank’s emphasis on the likelihood of the OCR staying put for some time was noted widely.

ASB chief economist Nick Tuffley said the Reserve Bank is more comfortable with the inflation outlook, given the large jump in Q4 inflation and signs of broader inflation pressures starting to come through.

“The policy bias is the same as in November, with the Reserve Bank saying that monetary policy will remain accommodative for a considerable period due to numerous uncertainties, particularly in respect of the international outlook.

“Like the rest of the world, the Reserve Bank is waiting to see what impact President Trump will have.”

The Reserve Bank’s own OCR projections show the OCR remaining at 1.8% well into 2018, he said.

“Effectively, that is a neutral stance in the here and now, compared to the 1.7% track in November that showed a hint of easing bias.”

But the Reserve Bank does have a full 25 basis point hike built in by early 2020, Tuffley said.

“We would highlight that, barring a major negative shock, it is unrealistic now for the Reserve Bank to hold the OCR at a stimulatory level indefinitely. The flagging of a distant tightening is more realistic.

“We continue to view OCR increases as a long way off, towards the end of 2018.  In contrast, market pricing favours late 2017/early 2018.”

ANZ chief economist Cameron Bagrie agreed the announcement contained no surprises and said the Reserve Bank is playing pretty straight off the bat.

The market would have liked something more hawkish, like a hat tip towards when the OCR might be raised again, he said.

“But the Reserve Bank has kicked that notion to touch. The Reserve Bank is clearly comfortable keeping the OCR on hold for some time.

“There were a few subtle tweaks in the comments but the spirit is clear: they are in no hurry to raise rates.”

NZIER senior economist Christina Leung said the Reserve Bank’s statement made it clear that interest rates will remain on hold for some time.

They are toning down the hike bias that the market seems to have got ahead of itself with, she said.

“The Reserve Bank indicated that there is not likely to be an OCR hike for some time.

“But they have left room to ease if required. While there is a more positive economic outlook, the Reserve Bank is quite wary about global uncertainties – so they have retained some room to move.”

Overall, it looks as though there are no OCR hikes on the card for a while, Leung said.

“We continue to expect the Reserve Bank is likely to hike the OCR around mid-2018.”