sign up log in
Want to go ad-free? Find out how, here.

RBNZ holds OCR at 3.5%; says "period of assessment appropriate"; drops comment on further hikes; warns again on high NZ$

RBNZ holds OCR at 3.5%; says "period of assessment appropriate"; drops comment on further hikes; warns again on high NZ$

By Bernard Hickey

It's official.

Interest rates are on now on hold for the forseeable future after the Reserve Bank of New Zealand all but removed its monetary policy tightening bias on Thursday morning because of a surprising absence of inflationary pressures despite a strong-growing economy.

The central bank held the Official Cash Rate at 3.5% as expected and repeated its expectation of an unspecified "period of assessment" before it makes "further policy adjustment."

But the Reserve Bank did shift its language slightly about future rate hikes, dropping a comment used on September 11 about "some further policy tightening" being necessary to keep inflation near its 2% target. Instead, in this OCR statement, it simply said a period of assessment was needed before policy adjustment, without specifying it would be a tightening.

However, the bank kept its warning that it expected inflation to increase as the economy's expansion continued. It also repeated its warning that the New Zealand dollar was "unjustifiably and unsustainably" high, and continued to constrain growth in the tradables sector.

Economists described the statement as dovish and noted the bank had formally dropped its tightening bias.

BNZ Head of Research Stephen Toplis said the Reserve Bank had been spooked by the fact it could not find any inflation.

"Unlike the Fed, who this morning intimated that the near term drop in inflation was transitory, the RBNZ thinks it might be more permanent," Toplis said. "Accordingly, it has, for all intents and purposes, said it is on hold for the foreseeable future," he said.

In recent weeks economists have extended the length of the Reserve Bank's expected pause until September 2015 at the earliest after much lower than expected inflation figures in recent months, both in New Zealand and globally. This has lowered expected wholesale interest rates and has been passed on by banks as lower fixed mortgage rates in recent weeks. Wholesale 'swap' rates fell another two or three basis points after the monetary policy decision this morning.

Reserve Bank Governor Graeme Wheeler said the global economy was growing at a moderate rate, although some data suggested some softening in major economies apart from the United States. Wheeler noted monetary policy was expected to remain supportive for longer in all the major economies.

New Zealand economic growth had been faster than trend through 2014, which had reduced unemployment and added to demands on productive capacity. Low interest rates, high net migration and strong construction were supporting growth, although the bank expected growth to moderate over coming years to a more sustainable rate.

Repeated NZ$ warning

Wheeler said lower commodity prices had taken some pressure off the New Zealand dollar.

"However, its current level remains unjustified and unsustainable and continues to constrain growth in the tradables sector. We expect a further significant depreciation," he said. This a repeat of the 'unjustified and unsustainable' language used by the bank's September 11 Monetary Policy Statement, which was published after the Reserve Bank intervened in the currency markets in August.

The Reserve Bank releases its September intervention figures this afternoon.  The New Zealand dollar dropped 20 or 30 basis points to 78.0 USc after the Reserve Bank's statement at 9 am, having earlier fallen from 79.5 USc after the US dollar strengthened on the end of US Federal Reserve Quantitative Easing.

Wheeler said inflation remained modest in New Zealand with subdued wage inflation, anchored inflation expectations, weak global inflation, lower oil prices and the high New Zealand dollar being contributing factors. House price inflation had fallen significantly since late 2013 because of the 100 basis points of rate hikes from March to July and the bank's high LVR speed limit, he said.

"The economy appears to be adjusting to the policy measures undertaken by the Bank over the past year. CPI inflation is currently at a low level despite above-trend growth," Wheeler said.

"However, inflation is expected to increase as the expansion continues. A period of assessment remains appropriate before considering further policy adjustment," he said.

The bank said in its September 11 statement it expected some further policy tightening would be needed to keep future average inflation near 2%. The phrase around "further policy tightening" was dropped in this statement, as was the comment about the target of 2%.

Political reaction

Green Co-Leader Russel Norman described the bank's actions as a U-turn that showed its had run monetary policy too tight, causing unnecessary suffering through job losses and higher interest rates.

“Unfortunately the inflation projections were wrong and, more than that, the OCR isn’t the best tool to deal with inflationary pressures that do exist. This has been to everyone’s cost,” Norman said.

“Graeme Wheeler hiked interest rates on the expectation that inflation would rise, but that hasn’t been the problem. Beyond getting the inflation projections wrong, the bank relied too heavily on the OCR to try to crush illusory inflation by hiking interest rates across the board," he said.

“Higher interest rates have cost jobs, lifted homeowners’ mortgage payments and damaged exporters," he said.

“The inflation that is in the economy is rooted in house and electricity prices and that pressure remains because National has pursued its failed policy to leave it to failing markets to sort these things out.To be fair to Mr Wheeler he has used Loan to Value Ratios to try to limit house inflation, but this has hurt first home buyers more than house speculators. What we need is for the Government to play an active role in the housing market and to curb the anti-competitive behaviour of electricity companies."

Economist reaction

ANZ Chief Economist Cameron Bagrie said there were clearly more dovish nuances in the Reserve Bank's statement, validating ANZ's view that the OCR was on hold for an extended period. Here's his comments:

While the RBNZ still has a tightening bias (inflation is after all still expected to move up as the expansion continues), executing on this looks to be far off given current uncertainties and ambiguities, with the RBNZ in effect delivering a neutral statement. In fact one could easily take today’s statement as suggesting the tightening cycle is close to an end (trend growth, low inflation, easing house price inflation, etc).

However, the central scenario still looks one of slow uplifts in inflation going forward and on that basis further upwards tweaks to the OCR look inevitable (but not imminent). Looking forward, we expect a December 2015 start to OCR hikes, but for this to be highly data dependent given the uncertainties surrounding the outlook.

BNZ Head of Research Stephen Toplis said the Reserve Bank had dropped its tightening bias.

The RBNZ has been spooked by the fact that it can’t find any inflation. Unlike the Fed, who this morning intimated that the near term drop in inflation was transitory, the RBNZ thinks it might be more permanent. Accordingly, it has, for all intents and purposes, said it is on hold for the foreseeable future.

ASB Chief Economist Nick Tuffley said the Reserve Bank had removed its conviction about future rate increases and now had only a mild tightening basis. Here's his comments:

Today’s RBNZ statement reinforces that the RBNZ is a lot more wary of the risks of inflation being persistently low.  The RBNZ is effectively questioning whether further OCR increases will be needed – the most significant shift in the RBNZ’s view.  It has a tightening bias still, but it has been watered down considerably.  Just for the record, we see OCR cuts as unlikely, particularly if the NZD continues to moderate over time and provide an effective loosening in monetary conditions.  Moreover, fixed-term rates remain lower than they were before the RBNZ started lifting the OCR.

We shifted our OCR view to a 25bp hike in September 2015 and a further final hike in March 2016 after last week’s very benign inflation outcome.  Headline inflation is likely to remain near 1% over the following 2 CPI releases, which in our view virtually rules out OCR increases over the next 6-9 months.  But we do expect inflation to start heading up markedly in the second half of next year, in part as the NZD falls further in time.

Risks are balanced to our forecast of further OCR increases.  Any substantial weakness in the NZD or sharp rebound in dairy prices would reverse some of the reasons for recent RBNZ restraint.  Migration could continue to strengthen and the housing market also look less benign.  And the RBNZ’s assumptions that the inflation-generating process is now milder and slower in occurring could turn out to be wrong.  But the longer the RBNZ remains on hold the greater will become the conviction that growth, migration and the housing market are past their peak, and the less likely future OCR increases become.

Westpac Chief Economist Dominick Stephens said the Reserve Bank now had only the barest of tightening biases. Here's his comments:

Significantly, there is now no explicit reference to lifting the OCR. However, there are a couple of clues within the new policy guidance sentences that do indicate that the RBNZ considers the next move is more likely to be up than down. First of all, the indication that inflation is expected to rise serves to rule out OCR cuts in the foreseeable future. Second, the words further policy adjustment must refer to an upward move in the OCR. 

Markets were prepared for a dovish statement, but the removal of any explicit reference to future hikes was a modest surprise. The two-year swap rate fell three basis points, and could fall further in the days ahead. 

This statement endorsed our OCR forecast, which is for the OCR to remain unchanged until September 2015, when a modest second tranche of hikes will begin.

More fuel for Auckland?

Carmen Vicelich, the managing director of property information service Valocity, said the decision would add fuel to Auckland house prices, although much of the rest of the country was subdued.

“Dropped talk of future rate hikes will also fuel the property market, particularly in Auckland where we are seeing significant pockets of soaring house prices," Vicelich said.

"However, When we look across NZ we can see the recovery post GFC has not been consistent. Auckland and surrounding areas are certainly reaching record highs and even surpassing previous peak values. Contrastingly though and somewhat alarmingly, some areas of New Zealand have not yet recovered since 2007 and continue to be in decline," she said.

"The holding of interest rates should help these areas recover."

(Updated with NZ$, interest rate reaction, economists' comments, Russel Norman comment, Carmen Vicelich comment, chart)

Mortgage rates

Select chart tabs

 

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

24 Comments

I wish he would make up his mind - flip flopping around is not advantageous for anyone - fixing term business finance costs is not easy at the best of times.

Up
0

... has he been taking his tea with sugar ... or with John Key ?

Up
0

It's Aspartame in the tea Gummy!!!

Up
0

It is advantageous to the RBNZ to introduce uncertainty. In the presence of uncertainty businesses excersise moderation.

Also it is the Mandate ot the RBNZ to keep inflation between 1-3%. Constant tweeking is necessary to do this because left on their own econimies tend to bounce between extreemes (creating "bubbles")

Up
0

Businesses might have been be goaded into paying fixed to receive floating IR swaps to fix term finance costs based on short term bank borrowing  - read the previous musings of one Roger J Kerr, on this site, extolling the virtues of readying business for higher rates down the track. We still await the outcome of a Commerce Commission interest rate swaps investigation in respect of prior farmer related disasters.

Up
0

Pardon......sadrool!!!

Do you work for the RBNZ??? or some other bureaucracy???? Or pehaps you are advocating that NZ's best interest is not the free market?

 

Oh by the way I think you'll find the policy targets agreement states the following:

The Reserve Bank Act requires that price stability be defined in a specific and public contract, negotiated between the government and the Reserve Bank. This is called the Policy Targets Agreement (PTA). The current PTA, signed in September 2012, defines price stability as annual increases in the Consumers Price Index (CPI) of between 1 and 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint.

 

I think you'll find that latter highlighted piece means "don't let prices deflate at all"...do what you can to maintain CPI increases.....business has self correcting moderation built in and has to exercise caution constantly. The worst type of uncertainty that business experiences comes from Government and bureaucracy it is also the biggest impediment to the economy and the people.

Up
0

No I dont think so on uncertainty.  The RB is all about offering a stable, safe outlook.

regards

 

Up
0

Stephen H, Fair enough up to a point. In my view he should have seen the softening in the world economy earlier. He should also have realised getting ahead of the world on interest rates was going to keep the NZD too high.

The one element in the inflation story that has I think surprised most, including presumably the RBNZ, is the oil price drop. The Saudis appear to be playing hard ball, which for the short term is good, but will threaten his inflation target. So on that one score he has a reasonable defence.

Up
0

I think US related attempts to inflict damage upon Russia after excluding it from western trading spheres were well signalled when the PM ejected Tim Grosser and his MFAT team from Moscow whilst pursuing an FTA many months back. That's what all this Five Eyes spying is for - right - early warning?

Up
0

Its not flip flopping ......... local intrerest rates have been neutralised by cheap  foreign money coming in .

Wheeler is between a rock and a hard place .

He  is unable to use the blunt instrument to slow spending or inflation domestically when we can fix mortgages and secured lending/ borrowing costs at much lower rates than floating rates

Up
0

Its not flip flopping ......... local intrerest rates have been neutralised by cheap  foreign money coming in .
 

Proof please? Certainly not cheap enough to cause the banks to lower domestic deposit rates, just yet. 

Up
0

Right!!! @ deposit interest rates below the most recently recorded GDPE annual nominal growth rate of 7.77%. The borrower is the truly subsidised winner and that is partly why those house prices keep rising and causing the financial distortions noted in these two related comments.

Places NZ in the banana republic category.

Up
0

Don't be a cripple - its an acknowledged fact our bank assets are in the 140% range of local domestic deposits. Hence NZ debtors have to call upon foreign wholesale lenders to make ends meet. 

Up
0

But don't those overseas lenders take security over top quality local mortgage paper - they get the cream of the paper don't they? - using those securitised thing-a-me-jigs

Up
0

Not directly - the banks can securitise up to 10% of total outstanding mortgage assets in the form of OBR exempt covered bonds - but these collateralised investors are not the wholesale foreign lenders - the later have another form of protection given that the cross currency basis swap hedges undertaken to protect the local bank borrower are also OBR exempt. This raises the reality that any costs of failure will fall disproportionately upon local NZ unsecured creditors.

Up
0

and thats the rub, the mis/reallocation of the ordering of who gets what.

Q: why should ozz parent equity & support of NZ subs rank ahead of local deposit holders (considering the dividends, tax yield & fees being drained off).

Maybe all literature should have the word deposit and deposit holder removed and replaced by unsecured creditor with a sold put option to distressed equity.

 

Up
0

The irritation is that RBNZ regulatory executives such as Mr Fiennes have the repugnant audacity to claim the moral hazard card in respect of  NZ depositors securing an exemption from OBR, when its clear they have made provision to exempt approximately one third of asset claims from OBR haircut demands, leaving the locals to shoulder the losses for all lenders. That is not an equitable outcome and demands public scrutiny. In fact it would not survive such an investigation hence the cringe making nature of deceit undertaken by the RBNZ in respect of informing those with most to lose.

Up
0

and here is one of the main 4

http://www.abc.net.au/news/2014-10-30/extended-interview-with-andrew-thorburn/5855912

billion dollar write downs

returns below WACC in two divisions - UK Banking & Wealth ops (the life business an issue) and USA banking assets up for sale.

not forgetting the issue of prouct mis-selling in UK.

 

NAB/BNZ thought of as a chronic underperformer

there is an active progrmme od divesting assets inorder to raise Aust capital Tier 1 ratio.....

happily the answer is more bankers..

 

yes all safe as houses.

 

Up
0

Stephen, Best guessing is all one can do to survive, when fluctuating trends are created by other fractuating events on a world scale, with vested interests, making bad decisions for you, counter to your own common sense.

For richer, for poorer, for ever and ever, Ah men.

You is married to em. And ye cannot divorce yourself from this absurd treadmill, we now are stuck for life.

 

Up
0

If Wheeler wants the NZ dollar to drop he should cut interest rates- but his pride is probably in the way.

Up
0

FYI updated with comments from economists on rates being on hold for the foresseable future, Russel Norman's attack on the Reserve Bank running policy too tight, and valuer Carmen Vicelich saying the dovish outlook will boost the Auckland housing market.

cheers

Bernard

 

Up
0

Wheeler should have slashed the OCR today! I feel sorry for the huge number of people who rushed to fix their mortgages recently, only to find that lower rates area available now, when they were fooled into thinking rates would increase by economists, bankers & Wheeler through their incorrect predictions. Soon we will see a wave of people paying penalty break fees and the banks will get a second windfall,

Up
0

Yep, Break Fees are a great source of extra income for banks, especially in recessionary and deflationary times -  while economists are anticipating 'back to normal anytime soon'.  

2009 was a good windfall year for break fees.   2015 is likely to yield good income from break fees from borrowers stranded on 6.5% rates.   

Up
0

If Wheeler wants to have any impact on the exchange rate he needs to make NZ less attractive to money market traders by slashing the OCR asap

Up
0