Reserve Bank makes no change to Official Cash Rate but says it still has scope to provide further stimulus in future if that's needed

Reserve Bank makes no change to Official Cash Rate but says it still has scope to provide further stimulus in future if that's needed

The Reserve Bank has left the Official Cash Rate unchanged at 1%, but says there is still scope for further stimulus if necessary.

The RBNZ said that new information it had received since the last Monetary Policy Statement by the bank in August "did not warrant a significant change to the monetary policy outlook".

It was always seen as most likely the OCR would be left unchanged after the RBNZ stunned the markets with a 50 basis points cut made at the last review on August 7.

However, the statement from the RBNZ was rather more upbeat than the markets were expecting and the odds on a November rate cut have now reduced.

The New Zealand dollar, which had been trading higher on Wednesday, rose further on the news, gaining to about US63.4c from a little over US63.1c before the announcement.

There had been evidence of some heavy 'short selling' of the New Zealand currency ahead of the OCR decision, which suggests some big speculators were taking a punt on there being a further OCR cut.

That being the case, some strengthening of the Kiwi dollar in the short term is quite likely.

Economists still see more rate cuts

ASB chief economist Nick Tuffley said even though the OCR remained steady at this meeting, a lower OCR "remains very much on the cards". 

"We continue to expect a 25bp cut in November, which today’s statement and meeting summary leave the door open for.  But by itself the statement suggests that a November cut isn’t a dead certainty, even though we think it is the highly likely outcome."

Beyond November Tuffley still saw the risks as being for further easing next year, given the risks remain stacked towards the RBNZ deciding even more stimulus is need to meet its inflation and employment mandates. 

Capital Economics Australia and New Zealand economist Ben Udy said he thought the RBNZ remained too optimistic on the outlook for growth in New Zealand.

"The [Monetary Policy Committee] minutes reiterated that the Bank expects a solid pick-up in growth in the second half of 2019. In contrast, we expect economic activity to weaken further. What’s more, business surveys suggest annual employment growth may soon become negative, which is why we think the unemployment rate will rise to 4.4% before long.

"With sluggish economic activity set to restrain inflation and employment growth, we think the Bank will cut rates to 0.75% by early next year."

ANZ chief economist Sharon Zollner said a “watch, worry (in private), and wait” stance for the RBNZ at this point "is very defensible".

"There has been a substantial easing in financial conditions in the past year, and as was noted in the Summary of Meeting, there are 'long and variable lags between monetary policy decisions and outcomes'. Interest rates have fallen substantially and the NZD is lower, and there is time to see what effect this has on confidence and economic activity," she said.

"But nonetheless, forward indicators such as the ANZ Truckometer indexes suggest that growth is going to continue to slide over the remainder of the year at least, weakening the medium-term inflation outlook. And with inflation expectations already low and falling, we suspect the RBNZ will again feel the need to shoot first and ask questions later – unleashing what little conventional firepower it has left by mid-next year.

"We continue to expect 25bp cuts in November, February, and May to take the OCR to 0.25% – around its useful limit."

This is the full statement issued by the RBNZ on Wednesday:

The Official Cash Rate (OCR) remains at 1%. The Monetary Policy Committee agreed that new information since the August Monetary Policy Statement did not warrant a significant change to the monetary policy outlook.

Employment is around its maximum sustainable level, and inflation remains within our target range but below the 2% mid-point.

Global trade and other political tensions remain elevated and continue to subdue the global growth outlook, dampening demand for New Zealand’s goods and services. Business confidence remains low in New Zealand, partly reflecting policy uncertainty and low profitability in some sectors, and is impacting investment decisions.

Global long-term interest rates remain near historically low levels, consistent with low expected inflation and growth rates into the future. Consequently, New Zealand interest rates can be expected to be low for longer.

The reduction in the OCR this year has reduced retail lending rates for households and businesses, and eased the New Zealand dollar exchange rate.

Low interest rates and increased government spending are expected to support a pick-up in domestic demand over the coming year. Household spending and construction activity are supported by low interest rates, while the incentive for businesses to invest will grow in response to demand pressures.

Keeping the OCR at low levels is needed to ensure inflation increases to the mid-point of the target range, and employment remains around its maximum sustainable level. There remains scope for more fiscal and monetary stimulus, if necessary, to support the economy and maintain our inflation and employment objectives.

Meitaki, thanks.

Summary record of meeting

The Monetary Policy Committee agreed the new information since the August Monetary Policy Statement did not warrant a significant change to the monetary policy outlook.

The Committee noted that employment remains close to its maximum sustainable level but consumer price inflation remains below the 2% target mid-point.

The Committee members discussed the initial impacts of reducing the OCR to 1% in August. They were pleased to see retail lending interest rates decline, along with a depreciation of the exchange rate.

The members anticipated a positive impulse to economic activity over the coming year from monetary and fiscal stimulus. The members noted that there remains scope for more fiscal and monetary stimulus if necessary, to support the economy and our inflation and employment objectives.

The Committee noted that, while GDP growth had slowed over the first half of 2019, impetus to domestic demand is expected to increase. Household spending and construction activity are supported by low interest rates, while business investment should lift in response to demand pressures.

The Committee expected increasing demand to keep employment near its maximum sustainable level. Rising capacity pressures and increasing import costs, higher wages, and pressure on margins are expected to lift inflation gradually to 2%.

The Committee discussed the long and variable lags between monetary policy decisions and outcomes.

The members noted several key uncertainties affecting the outlook for monetary policy, where there was a range of possible outcomes.

Global trade and other geopolitical tensions remain elevated and continue to subdue the global growth outlook, dampening demand for New Zealand’s goods and services.

Business confidence remains low in New Zealand, partly reflecting policy uncertainty and low profitability in some sectors, and is affecting investment decisions.

Fiscal policy is expected to lift domestic demand over the coming year. However, any increase in government spending could be delayed or it could have a smaller impact on domestic demand than assumed.

Some members noted that ongoing low inflation could cause inflation expectations to fall. Others noted that this risk was balanced by the potential for rising labour and import costs to pass through to inflation more substantially over the medium term.

The Committee discussed the secondary objectives from the remit and remained comfortable with the monetary policy stance.

The Committee agreed that developments since the August Statement had not significantly changed the outlook for monetary policy. They reached a consensus to keep the OCR at 1% and that, if necessary, there remains scope for more fiscal and monetary stimulus.

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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Keep these margin traders guessing.

They are nothing more than parasites to the economy. Go Jonkey go.

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ACC has posted an $8.7 billion deficit for the year, with record-low interest rates taking a major chunk of out its long-term forecasts.

But the public accident insurer says that loss is just on paper and there's no need for entitlements to change after also running a $570 million cash operating surplus.

The corporation presented its 2018-19 financial results to Parliament on Wednesday, with a huge increase in its "outstanding claims liability" (OCL) producing its highest-ever deficit and overshadowing other results.

Have I not said, cutting official interest rates in half doubles government's long term liabilities, valued in discounted present day dollars, hence more money has to be committed to secure previously forecast future income outcomes? Pensions, government debt are similarly affected and those whose wages rise in a similar manner without the power to negotiate a pay rise today.

No need for panic though. From the stuff article,
"But Rebstock forecast interest rates would come back "and when they come back we will see equally large movements the other way""

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interest rates can not come back, the debt is too high to service, if it came back in any meaningful way it would crash economies around the world

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In the future it's going to be an even bigger problem, kick it down the road till it comes to an end.

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..no such thing can't.

But if they don't, the pressure will just pop out and burst somewhere else. Artificially holding down interest did not not solve the problem, it is now much larger.

The crash has only be delayed, whether rates are raised or not is somewhat irrelevant.

There is no such thing as a free lunch, as some drunk on low rates and the ability to pile on endless debt seemed to think.

Ha! I was just about to write, 'there are no free lunches'
Lets try and prop up the indebted right now. And hopefully this time they will learn their lessons and not be so naughty in the future.
We'll deal with the fallout to everything else being punished by low interest rates later.

What happens if the global economy crashes anyway ? Rates are going to climb sharply on a reset ?

Be horribly unfair to ask speculators to repay debt, it would.

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Japan is still waiting decades on.

So if the OCR was quadrupled the government's long term liabilities would fall by 75%? Please explain how it works.

Work it out yourself. It's simple discounting of future cash flows with a higher or lower discount factor to derive their net present value.

Similar principles apply to stock valuation:

Yet the iron law of investing is that a security is nothing but a claim on a future stream of cash flows. Valuation is a crucial determinant of long-term returns. The higher the price an investor pays for those cash flows today, the lower the long-term rate of return earned on the investment..

The corollary is also true. The lower the long-term rate of return demanded by investors, the higher the price moves today. So clearly, changes in investors' attitudes toward risk will strongly affect short-term returns. If investors become more willing to take market risk, it is equivalent to saying that they are demanding a smaller risk premium on stocks (that is, a lower long-term rate of return). Prices rise as a result. Now, the fact that current stock prices are higher also implies that future long-term returns will be lower, but that's part of the deal. Link

It's your contention, can't you give an example at least?

1/1.02 is greater than 1/1.03 so as IR rises debt value falls. The reverse is true hence lease hold property reduces in value as rates fall.

Buy an HP12C - they come with all the necessary formulas and a "how to" manual, there might be a PC emulator online.

You’re wrong.

About what? - when I was a NZ stockbroker back in the early 80's, I comfortably calculated NZGS transaction prices, both clean and dirty, as part of my daily duties using said calculator.

Those were the days. I'm sure I still have mine somewhere.

A Liability doesn’t double if interest rates half. You sound like you have no idea about discounted cash flows yet you tell commenters to buy hp12’s.

It's okay, I have no idea what you guys are talking about either.

It depends on the term and the interest rate levels one is considering, I am taking liberties to make a valid point. Witness ACC and the yet to be revealed government off-balance PPP present value liabilities - a 100 year, 10 cent percent coupon bond funding a government liability starting at par would double in price if was discounted by a sudden yield collapse to 5%. - thereafter not so much. My claims are no more egregious than those made by central bankers in respect of "stimulus".

You’re free to say whatever you want of course, just refrain from telling others to buy hp12s when you have a cursory understanding of what you are talking about.

Too late for that.

exactly Audaxes...and the impact on retirement schemes is huge. The cash will not be there when the time arrives.

Fiscal stimulus is basically neutral, in so much as it crowds out private sector investment and there is no global evidence associating lower official interest rates with rising inflation and economic growth.

Fiscal stimulus, in the short run, is more likely to increase cost pressures further by adding to the demand side of the economy rather than supply.
What we need is policy intervention to incentivise capacity expansion, reduce market inefficiencies and relieve supply pressures.

That's exactly why we are witnessing public regulators such as ComCom and FMA becoming more active in recent months.

RBNZ: "New Zealand interest rates can be expected to be low for longer."
Mortgage holders - especially FHB - will be smiling for some time at this news. Not so those retirees whose strategy for supplementing the pension was the safety of term deposits.
Clearly we are most definitely in a new long term norm as opposed to that of the past when a low mortgage interest rate was 7% and a usual term deposit rate around 5 to 6%.

Yup there goes the old model up in smoke. Its cheaper to makevthe repayments on todays expensive hones than it was in 2006...crazy days!

Low inflation means the retirees' funds will last longer when they need to dip into them. Living on the interest alone is a nice to have not a necessity.

Hi HG
2% term deposit and 2% inflation = never ever, ever about living on interest only.
Trust you are enjoying the low mortgage rates.

Why pluck 2%, there are 3% TDs offered by banks and 6% by finance companies.

I am enjoying the low mortgage rates just as I suffered when they were 9% plus pre-GFC. What I don't do is come on this site crying my eyes out and inventing BS reason why the OCR should be set to make my life as comfortable as possible at the expense of others.

Look at the big upside in all of this, at least we haven't got the pernacious Allan Bollard in the RB to worry about this time round. I think his policy decisions were appallingly inappropriate and needlessly destructive. He single handedly prostrated the NZ economy while very obvious external events were piling up to create the GFC, meaning we were already in a self induced recession when the great recession hit a few months later. No wonder our economy has done so poorly over the ensuing years, Bollard basically wrecked it by blindly following economic dogma without asking if he really should be...

Wait for September CPI number to see where to next. CPI < 2% = OCR cut in November.

fingers crossed !

So why didn't they cut today if the HeavyG theorem was to hold?
https://www.stats.govt.nz/indicators/consumers-price-index-cpi

Perhaps the RBNZ don't prescribe to your theory of monetarism. Funny that..

CPI is quarterly so need to wait for the next quarter's results to see where to next.

But my point is why would the OCR change on lagged CPI figures.
Even you must realise that monetary policy isn't retrospective..?

Asked and answered. Time to agree to disagree.

We can also agree to disagree that the world is flat. Doesn't detract from the fact that it is categorically incorrect.
I don't think there is any contention that the interest rate mechanism is a forward looking tool based on expected CPI.
It's only you that disagrees with that fact.

Nymad, master of strawmanning.

Well. Your argument is that OCR decisions are entirely retrospectively based - this is categorically incorrect (like the flat earth concept).
So, nope. Not 'strawmanning' at all.

That's the definition of strawmanning.

Nope.
A strawman argument is one where someone misrepresents the argument proposed by the opponent.
You said we need to agree to disagree.
I said there's no point because, like a flat earth argument, we know that one side is factually incorrect - yours in this case.

You misrepresented me as saying the earth is flat and that we could disagree on that as well = strawmanning.

No I didn't. Read what I wrote. I never said you believed the earth was flat.
What I did was use an analogy. Not strawmanning.

You said "entirely retrospective", does that mean you accept the CPI is relevant when setting OCR?

Of course it is - it's the target, right. The primary target of the interest rate tool.
But it is expected CPI. Not lagged inflation as you consistently imply.

Sowhen you say stuff like "Wait for September CPI number to see where to next. CPI < 2% = OCR cut in November." it makes no sense.

I said CPI not "expected". Would you factor in the previous quarter's CPI when setting the OCR?

I said CPI not "expected".
Exactly. And that is why you are wrong.

As for the second part - it depends on how you nowcast/forecast inflation. But given the importance of mean reversion in forecasting, CPI in levels would not be used for reasons too complex to explain here.

This is where we ended up last time... "too complex to explain". If you can't explain something don't bring it up.

Well, time series theory is inconsequential here anyway in the scheme of things. If you have some understanding of martingale sequences/unit root hypothesis it might be of some benefit. But somehow I doubt that.
Ya just need to know that the OCR is a tool used to target future CPI movements. It is not a tool that reacts to past CPI levels.

If you were the RBNZ Governor and you were setting the OCR would you want to know the previous quarter's CPI?

Yes or no answer.

Now this is becoming a strawman argument.

You may want to know it. Because you'll get asked about it.
In a forecasting sense, you couldn't care less what the previous one quarter CPI figure was. You want to know what the CPI levels are likely to be 12 months following your OCR decision.

Reap what you sow.

Business NZ ought to be modernizing with boatloads of modern equipment and machinery at that lending rate...but they won't. It'll still be the same coldwar era machinery with a bunch more low wage immigrants filling the gap where a robot could be. Of course it works in the goodtimes but when it really comes down to being productive, usually in the recessions...our businesses won't be able to keep up! Yet again.

Takes bravery to invest in times of uncertainty and many small NZ businesses probably can't afford the risk

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milking robots have been around for years but farmers have found a cheaper way to get the milk in. rather than update
having had family in that industry for decades that have now left and been replaced, i have seen it and heard about it at field days first hand
I keep hearing all the BS about kiwis not wanting to work on farms, the real truth is they don't want to work for cheaper wages for the long hours
https://www.stuff.co.nz/business/farming/115892567/primary-sector-welcom...

Likewise the Zespri endorsed fruitpicking robot they use for kiwifruit AKA human trafficked migrant slave labour. Disgraceful.

It's easier to have the government allow them to import cheap workers that other taxpayers will subsidise, rather than invest in that sort of stuff.

Perhaps Reserve banks are no longer in control?

''Still has further scope to provide stimulus in the future''
Hows previous attempts been going?

looking forward to helicopter money, that's all that's left after two more cuts.

#MeToo or as the PM said #WeToo.

I like the idea of "low for longer" rather than "lower" for longer. Is this the bottom? I hope so.

Perhaps but seems unlikely. We still have pretty much full employment. If tourism ticks down and construction slows up then they will be cutting all the way to infinity and beyond.

Apparently, the RBA cannot understand why their economy is slowing down! “Unexplained reasons beyond the drought” has the RBA boss and his entire department puzzled.

This admission was made by The RBA Bank Governor in a recent speech.

Of course the other problem is the expectation of future cuts demotivates anyone from spending now because if you wait 3 more months it will be cheaper then and maybe even 3 months after that it will be even more cheaper...and things grind to a halt...asbwe are seeing currently. Case in point, my dear old mom, who has delayed starting her home renovation project yet again because...you guessed it...she's waiting for an even cheaper finance rate from the bank and reckons she can corner a nervous builder who's short on work and willing to reduce his prices compared to what she's been quoted lately....ruthless....never knew she thought like that!