Reserve Bank says economic developments since its August Monetary Policy Statement do not warrant a change to the already stimulatory monetary setting at this time; dollar rises, wholesale interest rates shoot up

Reserve Bank says economic developments since its August Monetary Policy Statement do not warrant a change to the already stimulatory monetary setting at this time; dollar rises, wholesale interest rates shoot up

The Reserve Bank has thrown up yet another surprise in its latest decision on interest rates - this time by not doing anything.

The Official Cash Rate has been left at 1%, despite broad expectations that it would be dropped to a new low of 0.75%.

The Kiwi dollar (which had dropped sharply on Tuesday) reacted quickly, jumping by over three-quarters of an American cent to over US64c.

Wholesale interest rates immediately reacted very sharply too, with the two-year swap rate shooting up by 21 basis points to 1.25%.

In August the RBNZ shocked the markets with a double cut from 1.5% to 1%, so, Wednesday's decision is a different sort of surprise.

The RBNZ's Monetary Policy Committee said it agreed that it was necessary for monetary policy to "remain stimulatory for some time" to meet its employment and inflation objectives.

"The Committee debated the costs and benefits of keeping the OCR at 1.0% versus reducing it to 0.75%. The Committee agreed that both actions were broadly consistent with the current OCR projection. The Committee agreed that the reduction in the OCR over the past year was transmitting through the economy and that it would take time to have its full effect.

"The Committee reached a consensus to keep the OCR at 1.0. The Committee noted that the risks to the economy in the near term were tilted to the downside and agreed it would add further monetary stimulus if economic developments warranted it."

Ben Udy, Australia and New Zealand economist for independent research company Capital Economics said the RBNZ "sounded cautious" when it left rates on hold, "but we believe that a deterioration in the economy will force the Bank to [cut the OCR to] 0.5% by early next year".

Captial Economics were just one of five forecasters polled by Bloomberg who correctly anticipated the decision to leave rates unchanged at 1.0%, while the the other 16 analysts polled had expected rates to be cut by 25 basis points.

Udy said the minutes of the RBNZ Monetary Policy Committee's meeting highlighted the improvement in recent data, noting that the increases in wage growth and non-tradable inflation were a result of previous monetary stimulus.

"But the Monetary Policy Committee remained cautious about the outlook, correctly noting economic growth would likely remain subdued over the second half of 2019.

"And we still think the Bank remains too optimistic on the prospects for growth in New Zealand. We expect GDP growth to slow to 1.5% next year, well below the Bank’s forecast of growth picking up to 2.5%. And weaker GDP growth will keep inflation below the mid-point of the Bank’s target and result in the unemployment rate rising from 4.2% in Q3 to 4.7% by the middle of next year. The minutes of the meeting noted that the committee thought “the risks to the economy in the near term were tilted to the downside and agreed it would add further monetary stimulus if economic developments warranted it”. On that basis, we think the Bank will cut rates twice next year to a record low of 0.5%."

This is the statement issued by the RBNZ on Wednesday:

The Monetary Policy Committee has decided to keep the Official Cash Rate (OCR) at 1.0 percent. Employment remains around its maximum sustainable level while inflation remains below the 2 percent target mid-point but within our target range. Economic developments since the August Statement do not warrant a change to the already stimulatory monetary setting at this time.

Economic growth continued to slow in mid-2019 reflecting weak business investment and soft household spending. We expect economic growth to remain subdued over the remainder of the calendar year. We will continue to monitor economic developments and remain prepared to act as required.

Trading-partner growth has also slowed. Growth in global trade and manufacturing is weak and uncertainty remains high, dampening global business investment. However, New Zealand’s export commodity prices have been robust, underpinning a positive terms of trade. The lower New Zealand dollar exchange rate this year is also providing a useful additional offset to the weaker global economic environment.

Domestic economic activity is expected to increase during 2020 supported by low interest rates, higher wage growth, and increased government spending and investment. The low level of the OCR has flowed through to lower lending rates more generally, which support spending and investment. Rising capacity pressures are projected to promote a pick-up in business investment.

Interest rates will need to remain at low levels for a prolonged period to ensure inflation reaches the mid-point of our target range and employment remains around its maximum sustainable level. We are committed to achieving our inflation and employment objectives. We will add further monetary stimulus if needed.

And this is the Summary Record of Meeting for the MPC - November 2019 Statement

The Monetary Policy Committee agreed that economic developments since the August Statement had been offsetting for the monetary policy outlook. The members discussed the projections and agreed that they formed a sound basis for their monetary policy decision, but noted the near-term downside risks to the economy.

The Committee agreed that accommodative monetary policy remains necessary to continue to meet their inflation and employment objectives.

The members noted that employment remains close to its maximum sustainable level while consumer price inflation remains below the 2 percent target mid-point but within the 1 to 3 percent target range.

The Committee noted that global growth had continued to slow. The members noted the weak global trade growth and continued elevated uncertainty.

The Committee discussed the impact of the global slowdown on New Zealand through trade, confidence, and financial channels. While the impact on New Zealand was seen to be negative overall, some members noted that our export commodity prices remained elevated which was boosting our terms of trade and national income.

The Committee noted the slowdown in domestic GDP growth. They also noted that business surveys suggest weak growth has continued over the second half of 2019. The members discussed the slowdown in potential output growth, which may explain the economy remaining near capacity over this time. Weaker demand was expected to reduce capacity pressure in the near term, and ease some of the recent labour market tightness.

The members anticipated a lift in economic growth during 2020 from the easing of monetary policy that has taken place since early 2019 and from stronger fiscal stimulus.

The Committee noted the signs that recent monetary stimulus was flowing through the economy and supporting the medium-term growth projections. The members noted that the reduction in retail lending rates over the past year would support the outlook for consumption and broad investment. The Committee noted the lower exchange rate this year as another channel supporting the economy.

The Committee discussed the impact of fiscal stimulus on the economy. The members noted that fiscal stimulus could be greater than assumed. The members also discussed the potential delays in implementing approved spending and investment programmes.

The Committee discussed the recent inflation developments and, in particular, the recent increases in wage and non-tradables inflation. The members noted the increase in inflation and wages is an expected outcome of monetary stimulus transmitting through the economy. Some members noted the pick-up in non-tradables inflation in the September 2019 quarter was partly due to administrative prices.

The Committee also noted the slight decline in one- and two-year ahead survey measures of inflation expectations. Nevertheless, long-term inflation expectations remain anchored at close to the 2 percent target mid-point and market measures of inflation expectations have increased from their recent lows.

The Committee members discussed some of the reasons why long-term interest rates were near secular lows. They noted the contributions from global factors, including ongoing low inflation, declining neutral interest rates, and policy uncertainty. Given this, the Committee expected that low global interest rates would persist for some time.

The Committee discussed the effect of low interest rates on financial stability. The members noted the risks to the soundness of the financial system. They discussed the relationship between financial stability and the employment and inflation objectives, noting the current deployment of financial stability policies. The Committee agreed it was appropriate to continue to set interest rates to meet its inflation and employment objectives.

The Committee noted the Bank’s work programme assessing alternative monetary policy tools in the New Zealand environment, as part of contingency planning for an unlikely scenario where additional monetary instruments are required.

The Committee agreed that it was necessary for monetary policy to remain stimulatory for some time to meet its employment and inflation objectives. In terms of least regrets, the Committee discussed the relative benefits of inflation ending up in the upper half of the target range relative to being persistently below 2 percent.

The Committee debated the costs and benefits of keeping the OCR at 1.0 percent versus reducing it to 0.75 percent. The Committee agreed that both actions were broadly consistent with the current OCR projection. The Committee agreed that the reduction in the OCR over the past year was transmitting through the economy and that it would take time to have its full effect.

The Committee reached a consensus to keep the OCR at 1.0 percent. The Committee noted that the risks to the economy in the near term were tilted to the downside and agreed it would add further monetary stimulus if economic developments warranted it.

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10
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Bravo, Mr Orr. Keep surprising the Banks.

11
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Yes, I'm starting to wonder if it is just a "look who's boss" move.

Pity Orr doesn't know that the Banks are still the real "boss"

Interest rates will need to remain at low levels for a prolonged period to ensure inflation reaches the mid-point of our target range ...

So, maintaining the low price of that thing embedded in the price of all things - the cost of money - is going to raise prices to make the CPI reach target? I'm sorry. I just don't see how.
All it will do is encourage us to take on more debt to fund increasingly destructive activities. (But, alas, yes. We will continue to go down the wrong road to economic oblivion. Sigh...)

Maybe I’m telling you how to suck eggs here, but more borrowing and lower servicing costs results in more money in the system relative to the goods and services that consumers want to buy with that money, thereby reducing the value of money and pushing up prices. It is the amount of money in the system that is inflating, so you have more money going after relatively fewer goods/services. This causes prices go up for the same reason they would if govt went on a money printing binge.

Seems like Orr and Co wants to send a message that they are not bankers' friends !!

err, the banks have explicitly called for no cuts, lower rates negatively impacts profitability.

The bank economists were predicting cuts. Although they are detached from reality.

The markets economists are purely there to advise corporate and institutional clients on their expectations for monetary policy etc. Totally detached from what is in the wider banks best interest. The Westpac CEO just requested no more cuts.

The banks want to endogenise the OCR by controlling the narrative.

Wild Bill, JK, and Wheeler were happy for them to do so. Pity for them, there's now a new sheriff in town who takes the firm position that policy sets the direction of the economy.

What about the LVR's ?

14
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Maybe, just maybe, Adrian realises that lower rates on their own isn't the answer ( it isn't!) and is setting about targetting 'where' New Zealand spends its next lot of new debt? And LVR relaxation isn't part of the plan...In fact, tightening it again would be a good start towards 'using our debt wisely'.

The RBNZ will tell you that is macro-prudential policy... not monetary policy.

They are, apparently, completely separate things.

Of course! So an OCR of 0% on the horizon and LVR's back to 5% to rescue our economy. Good oh...

What about them? When have they ever changed the LVRs in an MPS? Wait until the end of November for the FSR announcement

holding rate here to me indicates increased likelihood of further relaxing of the LVR's. Investors currently need 30% equity - see this move to 25, or 20% from next years.

Owner occupiers will see similar relaxation -

Already booming markets like Palmy will be spurred on even further from this and the existing very low mortgage rates - another easy 20% annual gain on the horizon for Palmerston North houses over 2020.

Most likely reason Orr did not cut was a fear of spurring on housing prices. Accordingly LVR relaxation is unlikely as it would be at odds with RBNZ's OCR stance.

I see your point HeavyG, about 3 weeks ago I called the RBNZ to hold the OCR but cut the LVR, my reasoning was that he couldn't afford to do both, we shall see by the end of November

Indeed, from the way the regions are going in the latest REINZ report it looks like there is definitely no need to lower the LVR requirement.

Quite right, sorry I was under the wrong impression that the RB was pooling OCR & LVR settings (read announcements) together. I shall have to wait

And here come the pretzels!

Except here the pretzel is the NZD.

up 1c against the AUD immediately.

Happens every time a rate decision is made - the market goes into a frenzy for hours and only to return around where they were right before the announcement.

To levels last seen!!!

...2 weeks ago.

Phew, it will still take ~72 years to double my investment at a compound 1% interest rate rather than 96 years at 0.75%. Resisting consumption today just got a whole lot more attractive. I bet ACC and those funding pension liabilities breathed a sigh of relief.

There was no good reason for a cut so I'm not sure why there were expectations for one.

10
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Particularly when the government is already playing its part in propping up our economy using "demographic" easing.

That's brilliant - 'Demographic Easing'

Now Reserve Bank's hope is confidence ticks up.

Good decision, RBNZ has finally learned their lesson from their big cussie bro across the ditch. the RBA cut their OCR and as a side effect it fueled house price again and pushed up the wrong kind of inflation!

5th dec we see what the plans are for bank capital requirements - maybe they are going to ease up on this requirement seeing as it will effectively add to banks costs and add to interest rates if they do

Nah. Needs to happen as a hedge vs overseas storm clouds.

Yep, bigger issues coming that they are admitting to.

Thank god. I was about to start burning my dollars in place of firewood.

The new plastic notes aren't any good as firewood or TP..

They just shrink when you try to burn them. Worthless for lighting cigars.

I'll give you 10 x $5 bills for 1 x $100 bill when you are ready to start burning. That'll give you a lot more burn for your buck.

Surely, the sharp increase in the 10 year NZ government note yield from a recent low of 1.005% to ~1.48% must have caused the RBNZ to re-calibrate the critical, but nonetheless invisible, neutral rate upward during OCR deliberations? Big DV01 move.

Yes, big DV01 move but only unwinding some of the craziness of the last year.

The compression of the kiwi 10 year yield down to 1% made little sense to me, by all means hold down the short end via RB rate path...but the outlook for secular growth and inflation required to justify a steeply negative 10 year real yield, in a small open tradeable-driven economy like NZ, was always far too pessimistic, even in a global context.

I think you'll see it back to 2.5% in short order.

Oh dear no extra free money for markets and those with big collateral

A number of shares dropped in price after the announcement. Just not quite enough to make any of the big drops worth buying though.

Good job RBNZ. In my love hate relationship I love you again.

Good they have control over situation