Reserve Bank keeps interest rates at 1.5% and says 'a lower OCR may be needed over time'; Markets unsurprised; Economists pick August cut

Reserve Bank keeps interest rates at 1.5% and says 'a lower OCR may be needed over time'; Markets unsurprised; Economists pick August cut

The Reserve Bank (RBNZ) has kept the Official Cash Rate (OCR) at 1.50% as expected and said "a lower OCR may be needed over time". 

Its Monetary Policy Committee (MPC) said the global economic outlook had weakened and there was a risk domestic growth would continue to be subdued.

It said that relative to its May statement (in which it revised down its growth forecasts), the risks to achieving its inflation and employment targets were "tilted to the downside". 

The members of the MPC therefore agreed "more support from monetary policy was likely to be necessary".

Initial market reaction to the news was subdued. The New Zealand dollar rose from 66.3 USc to 66.6 USc.

The RBNZ's move prompted ANZ economists to revise their OCR outlooks down.

They joined ASB, Westpac and Kiwibank economists in forecasting the RBNZ's next cut would be at its next review in August, rather than in November. ANZ economists saw it making a further cut in November, rather than in early 2020 as previously forecast. 

The MPC pointed out the fact a number of central banks around the world are easing their monetary policy settings to support demand. 

It noted recent falls in oil and dairy prices and said drawn-out trade tensions could continue to supress global business confidence and therefore growth.

Zeroing in on how this environment affects New Zealand, the MPC said it had a “dampening” effect on business investment.  

Some members also noted lower commodity prices and upward pressure on the New Zealand dollar could see imported inflation remain soft.

Domestically, the MPC recognised gross domestic product (GDP) growth for the March quarter overshot its expectations.

Yet members were wary of the weaknesses behind the headline figures, and questioned whether some of the factors supporting growth (IE construction activity) would continue.

Members also noted two largely offsetting developments affecting the outlook for domestic growth: softer house price inflation and more government spending.

The MPC said household spending would be dampened if house price growth continued to be soft. It also noted falls in mortgage rates and the Government’s decision not to introduce a capital gains tax.

Yet the MPC said Budget 2019 included more government spending than expected.

Members were conscious of the fact capacity constraints and the time it takes to get new initiatives up and running could delay the time it takes for the Government to get its money out the door. This could impact growth.

The MPC noted the anomaly of private sector wage growth being slow, despite indicators suggesting capacity pressures in the labour market. It discussed “the possibility of this relationship re-establishing”.

On the other hand, it said the absence of wage pressure could indicate there’s still spare capacity in the labour market.

Some members pointed out reduced migrant inflows could see wage pressure increase in some sectors.

Here is the statement from the MPC:

The Official Cash Rate (OCR) remains at 1.5 percent. Given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower OCR may be needed over time to continue to meet our objectives.

Domestic growth has slowed over the past year. While construction activity strengthened in the March 2019 quarter, growth in the services sector continued to slow. Softer house prices and subdued business sentiment continue to dampen domestic spending.

The global economic outlook has weakened, and downside risks related to trade activity have intensified. A number of central banks are easing their monetary policy settings to support demand. The weaker global economy is affecting New Zealand through a range of trade, financial, and confidence channels.

We expect low interest rates and increased government spending to support a lift in economic growth and employment. Inflation is expected to rise to the 2 percent mid-point of our target range, and employment to remain near its maximum sustainable level.

Given the downside risks around the employment and inflation outlook, a lower OCR may be needed.

Here a summary from the MPC meeting: 

The Monetary Policy Committee agreed that the outlook for the economy has softened relative to the projections in the May 2019 Statement.

The Committee noted that inflation remains slightly below the mid-point of the inflation target and employment is broadly at its maximum sustainable level. The Committee agreed that a lower OCR may be needed to meet its objectives, given further deterioration in the outlook for trading-partner growth and subdued domestic growth.

Relative to the May Statement, the Committee agreed that the risks to achieving its consumer price inflation and maximum sustainable employment objectives are tilted to the downside.

The members noted that global economic growth had continued to slow. They discussed the recent falls in oil and dairy prices, and that several central banks are now expected to ease monetary policy to support demand.

The Committee discussed the ongoing weakening in global trade activity. A drawn out period of tension could continue to suppress global business confidence and reduce growth. Resolution of these tensions could see uncertainty ease.

The Committee discussed the trade, financial, and confidence channels through which slowing global growth and trade tensions affect New Zealand. The members noted in particular the dampening effect of uncertainty on business investment. Some members noted that lower commodity prices and upward pressure on the New Zealand dollar could see imported inflation remain soft.

While global economic conditions had deteriorated, the Committee noted that domestic GDP growth had held up more than projected in the March 2019 quarter. The members discussed disparities in growth across sectors of the economy, with construction strong and services weak. The members also discussed whether some of the factors supporting growth in the quarter would continue.

The members noted two largely offsetting developments affecting the outlook for domestic growth: softer house price inflation and additional fiscal stimulus.

The Committee noted that recent softer house prices, if sustained, are likely to dampen household spending. The Committee also noted the recent falls in mortgage rates and the Government’s decision not to introduce a capital gains tax.

The Committee noted that Budget 2019 incorporated a stronger outlook for government spending than assumed in the May Statement. The members discussed the impact on growth of any increase in government spending being delayed, for example due to timing of the implementation of new initiatives and current capacity constraints in the construction sector.

The members discussed the subdued nominal wage growth in the private sector and the apparent disconnect from indicators of capacity pressure in the labour market. The Committee discussed the possibility of this relationship re-establishing. Conversely, the continuing absence of wage pressure could indicate that there is still spare capacity in the labour market. Some members also noted that reduced migrant inflows could see wage pressure increase in some sectors.

The Committee discussed whether additional monetary stimulus was necessary given continued falls in global growth and subdued domestic demand. The members agreed that more support from monetary policy was likely to be necessary.

The Committee discussed the merits of lowering the OCR at this meeting. However, the Committee reached a consensus to hold the OCR at 1.5 percent. They noted a lower OCR may be needed over time.

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Do we really believe that softer house prices are dampening consumer spending?

Of course! A decrease in REA commissions certainly has an effect on Audi, BMW and Mercedes sales.


This also bothers me (the frequency that it is stated).

If a third of us are renters, then softer prices might make us feel better and spend more. Or in fact the opposite - make us feel like saving harder for that deposit.
For the home owners in NZ, what percentage of us are still fooled by the idea we could remortgage or live off our perceived equity?

vs how many agree that the high cost of housing is a huge obstacle to the wellbeing and productivity of our country?

Yes. it’s the wealth effect going into reverse, and it was bound to happen after the housing bubble we’ve had (still having).

Economies are to a large extent about animal spirits and confidence. So yes, I think softer housing will be having an impact.


Conversely then, do we also believe that ever inflating house prices encourage consumer spending?

Surely it must come down to demographics too. High house prices might put a dampener on spending by younger people as they have to save more and more of their income, leaving only the older folk to consume more.


Constant OCR fiddling conceals important economic signals.


If CPI stays at 1.5% or is lower computer says August will be cut to 1.25%. "Looks like meats back on the menu boys!"

This is just like the captain announcing over the PA to all passengers "brace, brace, brace".
Now it's up to him/her to bring it in for a soft landing.. or a hard one!

Yes, I think the soft/hard landing parable has merit. Trouble is we're all so connected these days you can't hide a good recession anywhere. Hate to be a killjoy but another couple of tough years won't do us any harm. Cleans out the cowboys (or cow boys in our case) & will bring the price of a bit of dirt back to level III. There will be some minor casualties but that's just life.


"It's just tough luck" say the boomers who drove prices up, cashed out at peak and paid not an iota of tax.

We are about to see the current economic model for what it is: something that treats young people as collateral damage (as if we needed more proof of that).

Tax is theft driven by envy, I'll have you know!

Now, take income off those greedy young whippersnappers and pay me my pension!

The RBNZ has an implacable record of forecasting . First quarter GDP far exceeded our forecasts. The national median house price is just below all time highs , but obviously not inflating quick enough. For the increasing number of renters, (possibly not an issue for those on the committee), there can be no direct household wealth effect from rising house prices. Readymix concrete delivered in March quarter at record same quarter high , not withstanding the slowdown in Christchurch, so construction actually appears to be holding up. .The committee noted the recent fall in oil prices , yet Q2 will see one of the largest Q/Q rises in fuel prices often marked by a spike in the CPI. However the committee appreciates that the Auckland housing market has stalled and we will need the lowest ever OCR setting to support our four unblemished record profit churning Australian banks and whatever lies within their books. If no substantive trade agreement is reached between China and Australia, the RBA will cut next week and AUD/NZD will go to parity. Of course its only a forecast.

All in all. Sound analysis. Definitely they cater to the speculators and the 'haves' with this economic socialism. Savers can go die.

Does the readymix data seperate out market segments it is delivered to? Might be interesting to see if the volume to individual sectors is changing. Residential construction down and infrastructure up? or vice versa? Or is it commercial/industrial construction keeping the concrete flowing?


The alarm bells are ringing

True. They've been ringing for a while now. It's just lately they've been getting louder. Sadly, there are always the herd of blissfully naive that suffer the biggest theft of unbanked wealth. If its an "L" shaped slump (think Japan), asset price appreciation to devalue unshifting debt will prove elusive...

"The MPC pointed out the fact a number of central banks around the world are easing their monetary policy settings to support demand."

Perhaps not the most compelling argument.

I want to know why new vehicle sales fell 14% in May? This data is strongly correlated to home values.

We have ANZ getting hammered by media, government, including WP. RBNZ is in there overseeing capital attestation. RBNZ is also putting pressure on regarding recapitalising over the next 5 years. Finally with the introduction and adoption of IFRS9 for current reporting, it is generally accepted that bank provisioning would rise by around 50%, from the prior standard. There has been almost no noticeable change. Why? The adoption of this will put even more pressure on bank capital. What's going on? So many questions.

Hmm.. Govts who know fiat currency systems are vulnerable, are strengthening their positions by buying up Gold.. when I tried to find out what gold reserves NZ has the answer was - Zero; most of the Gold reserves were divested in the 1960s. The last remaining gold was sold in 1991. Does anybody else think NZ could improve on it's plan by putting some of the surplus towards Gold? I think the housing bubble is all the QE from 2008 has run down stream and affected us. No need to repeat the same methods locally if we can help it. Gold bull run now until 2026.

" Does anybody else think NZ could improve on it's plan by putting some of the surplus towards Gold?"


Very good. I ask since, I've been working for a company who has worked very closely with China for well over a decade..
Now, this year it feels like we are already in a recession; there has been very little and often no work. It's awfully quite so I came here to find out what is going on. Since it feels like we are in a recession in my industry, it bumps me a bit and I have a hunch I should be going back to gold standard for the next few years. Good to hear there's confidence elsewhere ;o)

property development?

Movies; Feature Film; Animation ;o)

FB's Libra will solve all problems soon. Don't despair..

Before you buy into the whole gold bug emotion, I think there are some key factors which will make a return to a gold standard and USD10k/oz highly unlikely:
- Govts/central banks are unlikely to ever support a return to the gold standard. Depending on the architecture, a limit on credit creation, etc, would tank the global economy overnight. While todays system is on borrowed time, a return to the gold standard is not the answer.
- Fiat currencies have existed for centuries and it can be argued that anything can be fiat - paper, electronic, silver, gold, oil, etc. They are all based on confidence at the time and the medium per se is not that important.
- The youth don't have any belief/faith in gold and will not be buying/hoarding coins/bullion anytime soon. While it will always have a place as an asset class like any other, don't expect it to come back as the backing for any future currency.
- If you'd followed gold bug advice and put all your money into gold in the 70s/80s/90s, then you would have gone backwards relative to property, shares, etc. They will then say that 40-50yrs is not a long time...well, yes, if you're planning to live to 150yrs or so.

- Govts/central banks won't accept any form of currency that they don't have total control over (including cryptos, gold, etc), so that is not a positive either.

This position from the RBNZ/MPC is the right move to try meet their objectives.

It's just a shame their +-2% objective is so antiquated. Anchoring in the worst.

Why not target inflation rate to be within 50 basis points above or below the OECD average, or another dynamic way to target outcomes relative to wider global events....

The bible requires a debt jubilee every 50 years = 2% inflation. Learn the word of god (Leviticus 25:10) you heathen!

This MPC and the requirements to maintain full employment are a joke. Bring on the recession.