Surprise at RBNZ’s OCR outlook

ASB chief economist Nick Tuffley said the key point in today’s announcement was that the events of the last few months haven’t had an impact on Reserve Bank’s OCR outlook.

Despite positive inflation outcomes and a pick-up in inflation expectations they are sticking to their neutral stance, he said.

“The Reserve Bank’s OCR outlook was unchanged from February’s MPS, still implying a late 2019 tightening.

“We had expected some bringing forward of the implied tightening to the first half of 2019. And we still think that the Reserve Bank will lift the OCR earlier than its current stance, probably in late 2018.”

Whatever the case, the timeframes involved are a year or more away and that is an eternity in financial markets, Tuffley said.

“At this point, it is clear the Reserve Bank is in no hurry to start putting up the OCR.

“This will contain short term interest rates. But rates are at the mercy of global long term rates and their impact on fixed rates.”

For Westpac acting chief economist Michael Gordon it was surprising that the Reserve Bank has concluded that developments since the February MPS have been neutral for monetary policy.

“We and the market had expected it to signal an earlier start to interest rate hikes,” he said.

“But the Reserve Bank seems to be firmly of the view that the unexpected jump in inflation to 2.2% last quarter was due to temporary factors.”

While Westpac is broadly in agreement with the Reserve Bank that domestic inflation pressures are still subdued, there are still some aspects of their forecasts that concern them, Gordon said.

“Consequently, we still think that OCR hikes will be later than what financial markets were pricing (March 2018), but earlier than the Reserve Bank is signalling (late 2019).”

He added that the Reserve Bank finally acknowledged the slowdown in the housing market over the last six months, which will weigh on growth in household spending.

NZIER senior economist Christina Leung agreed that it was interesting that the Reserve Bank has kept to its neutral stance so strongly.

“The fact that they are maintaining such a flat OCR track and continue to forecast there will be no increase in the OCR until late 2019 is a bit surprising,” she said.

“Depending on developments, we expect an earlier start to the tightening cycle. We expect them to start lifting the OCR from the end of next year.”

However, she was not surprised that the Reserve Bank remains cautious in its outlook.

“Overall, they are probably more comfortable with inflation outcomes but it is offshore issues – particularly uncertainty around the political landscape – which is making them cautious.

“They probably don’t want to boost the NZ dollar with anything too hawkish.”