Reserve Bank leaves Official Cash Rate unchanged at 1.75%; small upward move in interest rates projected in 2019

By David Hargreaves & Alex Tarrant

The Reserve Bank has left the Official Cash Rate unchanged at 1.75%, but is now forecasting a small rise in interest rates in future.

However, the immediate outlook portrayed by the central bank was probably more 'dovish' than the market expected, and therefore the Kiwi dollar reacted by dropping over half a cent against the American currency, to under US72.5c.

The immediate OCR outcome was expected, with most market attention on whether the RBNZ changed its outlook for the OCR in future years.

It has - slightly, from the last Monetary Policy Statement (MPS) in November, when it was forecasting unchanged rates right through till the end of 2019.

It now, however, has the OCR moving up by the equivalent of about a quarter of a percentage point in 2019.

RBNZ Governor Graeme Wheeler said the Reserve Bank now has a very much "neutral" bias on the OCR against a slight easing bias in November. Now the risks on increasing against decreasing the OCR are evenly balanced

The RBNZ now forecasts an average of 1.8% through June 2019 (previously 1.7%), before rising to 1.9% in the second half of 2019 and hitting 2.0% in March 2020. The bank had previously forecast a 1.7% average through 2019.

However, it has also delayed slightly when it expects annual CPI inflation to hit 2% - now in June 2019 against December 2018 in its November MPS.

The market has been expecting interest rates may begin to rise as soon as later this year, though most economists don't believe that to be the case. Wheeler said he thought the market had "got a bit ahead of itself".

On the housing market, Wheeler said the recent moderation in house price inflation was welcome, and in part reflected the new loan-to-value ratio restrictions put in place by the RBNZ from October and also recent higher mortgage rates. 

He said, however, It was "uncertain" whether this moderation will be sustained given the continued imbalance between supply and demand.

Wheeler noted that headline inflation had returned to the RBNZ's 1% to 3% target band as past declines in oil prices dropped out of the annual calculation. 

"Inflation is expected to return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradables inflation.  Longer-term inflation expectations remain well-anchored at around 2%."

In the key 'last paragraph' of his statement, and in what was virtually a repeat of the November statement, Wheeler said monetary policy would "remain accommodative for a considerable period".  He noted, however, that numerous uncertainties remain, particularly in respect of the international outlook, "and policy may need to adjust accordingly".

This statement was immediately seen by the marketplace as surprisingly 'dovish' given the recent upward shift both in real and expected inflation, hence the fall in value of the Kiwi dollar.

ANZ chief economist Cameron Bagrie and senior economist Philip Borkin said the RBNZ statement was "as cautious as it could possibly be, given the growth backdrop".

"A previous soft easing bias was removed, but the message is that the OCR is not going anywhere in a hurry. That is entirely appropriate in our view."

Here is the statement from the RBNZ:

Statement by Reserve Bank Governor Graeme Wheeler:

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.

The recovery in commodity prices and more positive business and consumer sentiment in advanced economies have improved the global outlook.  However, major challenges remain with on-going surplus capacity in the global economy and rising geo-political uncertainty.

Global headline inflation has increased, partly due to rising commodity prices.  Global long-term interest rates have increased.  Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.

New Zealand’s financial conditions have firmed with long-term interest rates rising and continued upward pressure on the New Zealand dollar exchange rate.  The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector.  A decline in the exchange rate is needed.

Economic growth in New Zealand has increased as expected and is steadily drawing on spare resources.  The outlook remains positive, supported by ongoing accommodative monetary policy, strong population growth, increased household spending and rising construction activity. Dairy prices have recovered in recent months but uncertainty remains around future outcomes.

Recent moderation in house price inflation is welcome, and in part reflects loan-to-value ratio restrictions and higher mortgage rates.  It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.

Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation.  Inflation is expected to return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradables inflation.  Longer-term inflation expectations remain well-anchored at around 2 percent.

Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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10 Comments

A good time for Wheeler to leave it to Spencer to front up.
Wheeler is already missing in action most of the time so no one would much notice the change.

Wheeler said monetary policy would "remain accommodative for a considerable period".

I suppose he believes this will stop the wheels falling off a banking system that expects fabricated credit to self generate it's own funding and remain stable.

The fatal flaw that was considered in 2007 (rather than LTCM 1997) but proven beyond doubt in 2011 was that so long as whatever bank liability any eurodollar bank might create was considered currency, further balance sheet expansion would thus create all the “dollars” necessary to fund it. Thus, that fatal flaw was its circular reasoning, that balance sheet expansion created “dollars” which funded balance sheet expansion, creating more “dollars” and so on. Remove the expansion and the inconsistencies, risk primarily, implode the whole intent. Like a spinning top, it can only ever be stable at high rates of growth, because when it slows everyone starts to question whether that math-as-money is actually real or merely, like alchemy or the Nigerian scam, an impossible dream. Read more

OCR unchanged at 1.75, while floating mortgage rates at 5.7 or 5.8%.
That's quite a gap.

I wish I had a job that paid $500k a year to go missing in action.

Not quite 500k but there are 120 jobs in Wellington coming up in September.

and you could say that most of them are missing in action most of the year

I sometimes wonder if the RBNZ actually know what they are doing .

10 years ago the OCR was 8% , today its 1,75%

Our GDP is the same as 10 years ago , our employment rate is the same , so why is the OCR so low ?

Only inflation is down but not in " tandem' with the OCR

Low interest rates have only 4 outcomes ( all of which are undesirable) :-

1) A misallocation of resources
2) A massive disincentive to saving ( and thus Capital formation)
3) A massive increase in asset prices as money chases yields in rents dividends or Capital Gain
4) A debt fueled spending binge ( just look at all the new cars on the roads)

Its a recipe for long-term disaster

You nailed it Boatman...

And we're seeing all of those and the commensurate negative effects in NZ. Its the he blind leading the blind on an ideological hamster wheel - going faster to get no where.

You need to elaborate on why the above outcomes are bad. If there are low interest rates it is an indication there are not the opportunities out there to make larger returns on capital. The investment in capital assets as opposed to business ventures may indicate the lack of opportunities for investment.

Simply increasing the interest rate does not mean that there will all of a sudden be a flood of new business ventures. In fact, if a low interest rate environment is not fuelling innovation and business then a high interest rate will well and truly end what little new business activity there may be.

I know you baby boomers are bemoaning the low returns on your cashed up windfall from selling NZ to the Chinese but the answer isn't an increased OCR, you may just have to stop relying on other people making money (and paying you interest) and start your own business venture.

Simply stated the OCR is low as inflation is low. Inflation is low as prices are not increasing. In my opinion prices are not increasing as the World has become better at producing goods and services at a lower cost and also because the NZ economy is doing well.

You want a high OCR that will mean high inflation as in Venezuela. Hands up who wants to live in Venezuela...

"the OCR is low as inflation is low"
So...if you had a business and the cost of capital, the interest rate used to finance you business, went from 4% to 14%, what would you do to the price of your product? Drop prices to stimulate more sale or raise prices to cover the cost of production? Most businesses by far will raise prices, and what does that do to the level of 'inflation'?