Reserve Bank stuns economists with OCR cut prediction

Wednesday 27 March 2019

The Reserve Bank has surprised economists by stating the next OCR move is "likely to be down" due to slowing domestic and global growth. 

The central bank abandoned its neutral stance and adopted a downside view as it kept the OCR at 1.75% today. The RBNZ made clear the next change is more likely to be a cut than a hike, pointing to a "weaker global outlook" and "reduced momentum in domestic spending". It said dovish recent statements from global central banks had put upwards pressure on the Kiwi Dollar.

Economists were caught off guard by the announcement, just a month after the central bank said the next move could be "up or down" at February's MPS. Leading commentators said Adrian Orr is preparing the market for a cut.

Jeremy Couchman of Kiwibank said: "It is a tip towards a cut, and that was certainly a surprise. I would have expected an acknowledgement of what is going on offshore, but I think the [RBNZ] was trying to signal towards the downside scenario they pointed to in February, that if the global economy started to deteriorate, they would make some cuts. They are directing markets towards that."

Couchman said Kiwibank has re-assessed its OCR forecast, having previously predicted a hike in mid 2021. "We now expect a rate cut in the May MPS meeting, under the freshly formed committee. We now expect a 25bp rate cut in May, followed by another cut in August – largely depending on the performance of the currency," Couchman said in a statement. 

Nick Tuffley of ASB said: "The Reserve Bank has been quite explicit that a cut is more likely than a hike. It has translated concerns about global growth and the domestic economy not being as strong as forecast, and that it will need support to generate inflation pressure."

Tuffley said financial markets had trended towards a cut in the past few months. "The statement today has validated that market stance. We have seen wholesale markets depressed, and those markets will remain low for the time being."

Another economist, NZIER's Chrstina Leung, also expressed s, having expected the central bank to "reiterate their neutral stance". She added: "They appear to be more worried about offshore developments, and the implications for growth here in NZ. With other central banks having become more dovish in recent months, the Reserve Bank risked putting further upward pressure on the NZD should it retain its neutral stance."

Meanwhile, Michael Reddell, an independent economist who has long predicted an OCR cut, "strongly endorses" the explicit downside risk outlook. 

He said Orr's decision was interesting as the RBNZ's MPC is set to take on formal rate setting powers. "I am however, uneasy about this stance being adopted by the Governor days before he loses formal power to the (as yet unnamed) MPC.  He can't make commitments about the future of the OCR.  Having said that, he was in an awkward position -  the shift to an easing bias should have come earlier, and had he not made the change today he would have compounded the original "error".

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