Reserve Bank leaves Official Cash Rate unchanged at 1.75%; reiterates view that monetary policy will remain accommodative for a considerable period; notes recent construction sector weakness

By David Hargreaves

Different Governor, same outlook. Well, maybe a little less optimistic about economic growth prospects.

The Reserve Bank on Thursday kept the Official Cash Rate unchanged at 1.75% and reiterated the view that monetary policy would remain accommodative for a considerable period.

The decision was the first presided over by Acting Governor Grant Spencer, who will be in the job for six months till a permanent replacement is found for Graeme Wheeler whose term ended this week.

Spencer's first OCR statement was virtually unchanged from the last one issued by Wheeler in August. There was some slight tweaking of the language around expectations on the NZ dollar, with the statement this time around saying a lower valued dollar would "help", which was a change from the word "needed" used in the August statement.

Also, the RBNZ appears more cautious now about growth prospects for the economy and has paid attention to recent weakness in the construction sector.

The dollar was little changed after the announcement, trading at a little over US72c.

The RBNZ has forecast no rises in the OCR till late 2019 and there's nothing in the latest statement to suggest that view has changed.

ASB chief economist Nick Tuffley said the RBNZ had retained a "neutral stance".

"The growth comments [in the statement] hinted at a little more caution.  Construction’s recent weakness was noted, and GDP growth was noted as being expected to maintain its current pace. With [second quarter] growth of 0.8% [quarter-on-quarter] and the August [Monetary Policy Statement] forecasts showing 0.9%-1.0% qoq through to mid-2018, the RBNZ may have shaved its growth outlook slightly," he said.

Westpac senior market strategist Imre Speizer said there was not much for markets to react to in the statement, "apart from a hint of a possible downgrade to its construction activity forecast".

"We suspect markets will need to wait until the November MPS, when the RBNZ comprehensively updates its forecasts, to learn of any changes in the RBNZ’s thoughts."

Kiwibank chief economist Zoe Wallis and senior economist Jeremy Couchman said the "most significant change" in the latest statement was around the RBNZ commentary on the outlook for growth.

"The Bank now expects growth to 'maintain its current pace going forward' - this was a downward revision from the August MPS, which noted that 'growth is expected to improve'. While the statement noted that same growth drivers as were highlighted in the August MPS - population growth, stimulatory monetary policy, fiscal stimulus and a high terms of trade - it suggests the Bank's growth forecasts maybe pointing toward a slightly lower growth profile in coming years," they said.

"This isn't a surprise given the constraints we are currently seeing, particularly in the construction sector."

This is the statement from Spencer:

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

Global economic growth has continued to improve in recent quarters. However, inflation and wage outcomes remain subdued across the advanced economies and challenges remain with on-going surplus capacity. Bond yields are low, credit spreads have narrowed and equity prices are near record levels. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has eased slightly since the August Statement. A lower New Zealand dollar would help to increase tradables inflation and deliver more balanced growth.

GDP in the June quarter grew in line with expectations, following relative weakness in the previous two quarters. While exports recovered, construction was weaker than expected. Growth is projected to maintain its current pace going forward, supported by accommodative monetary policy, population growth, elevated terms of trade, and fiscal stimulus.

House price inflation continues to moderate due to loan-to-value ratio restrictions, affordability constraints, and a tightening in credit conditions. This moderation is expected to continue, although there remains a risk of resurgence in prices given population growth and resource constraints in the construction sector.

Annual CPI inflation eased in the June quarter, but remains within the target range. Headline inflation is likely to decline in coming quarters, reflecting volatility in tradables inflation. Non-tradables inflation remains moderate but is expected to increase gradually as capacity pressure increases, bringing headline inflation to the midpoint of the target range over the medium term. Longer-term inflation expectations remain well anchored at around two percent.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain 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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8 Comments

"...House price inflation continues to moderate ....This....is expected to continue, although there remains a risk of resurgence in prices......"
Translation of Spencer-speak "Don't panic the horses".....

Annual CPI inflation eased in the June quarter, but remains within the target range

Yeah, right!

Quantitative Easing has been given equivalency with money printing. Reserves are, after all, base money in every Economics textbook.

But, as FRBSF President John Williams noted in a speech given all the way back before QE3 in July 2012:

The important point is that the additional stimulus to the economy from our asset purchases is primarily a result of lower interest rates, rather than a textbook process of reserve creation, leading to an increased money supply. It is through its effects on interest rates and other financial conditions that monetary policy affects the economy.

QE wasn’t really money printing but might work as such if you believed it was. Monetary policy in an official world of regressions and correlations is more about feelings and manipulated expectations than actual money. In that way, Economics is more akin to astrology (the gloss of math and science) than either physics or auto repair.

The proof was available before Williams spoke, especially the part about interest rates. But if it was debatable prior to QE3, it is no longer so after its invention and conclusion. Interest rates fell more without QE than with it. In fact, almost three years after its completion, long treasury rates (those tied to economic perceptions where “stimulus” should be active) are lower now than at that time.

To address the disparity, some Economists have fallen back on IOER, the interest paid on excess reserves. Almost all of the excess is a byproduct of the four QE’s. As Williams claimed in 2012:

As a result, in a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid. In particular, the world changes if the Fed is willing to pay a high enough interest rate on reserves. In that case, the quantity of reserves held by U.S. banks could be extremely large and have only small effects on, say, the money stock, bank lending, or inflation.

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no surprises on construction weakening, the pre construction pipeline has been weakening with feasibilities not stacking up etc etc

" The real travesty is, “[The RBNZ] is teaching an entire generation of young people, who in many cases don’t study economic history, that growth requires government intervention.”

Back in 2008, even Janet Yellen knew there were problems with QE. During a December 2008 Fed meeting, she said there were “no discernible economic effects” from Japanese QE.....So forgive us for asking, but after unprecedented expansion of banking reserves and the Fed balance sheet, with little inflation, is it really a “mystery?” Or, is it proof of what we believed all along: QE didn’t work?.
..By claiming that low inflation is a “mystery” the Fed is admitting it doesn’t understand the mechanics of
QE. Yet, it is perfectly willing to allow people to think QE is what saved the economy. The only “mystery” is why they would allow this to happen .

http://ggc-mauldin-images.s3.amazonaws.com/uploads/pdf/OTB_Sept_27_2017.pdf

However, floating mortgage rates .....

“However, floating mortgage rates are likely to remain at very high levels, forcing home borrowers into short term fixed terms” He left out of his speech.

Of course there are cracks appearing in the construction sector ( pun unintended ) , and its simply because wage rates ( a 20 year old
chippy costs more than a freshly graduated GP ) and materials have escalated faster than contractors can price and finish the work , and building prices have reached stupid levels on a per square metre basis , a disconnect from reality . Auckland land costs nearly 2/3rds of the cost of a new home , and this should be roughly split 50/50

Also , there is sufficient evidence of buyer push-back .

The whole mess is attributable to immigration policies pursued by National , and even if the economy slows , we need to hit the pause button until we have a plan to cope with inward migration at the current rates

Exactly right.
There's a fair bit of Housing NZ building happening, but private house building is slowing considerably, for all the factors you raise.
Also doesn't help when resources are needlessly sucked into the shenanigans that is leaky building repairs:

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1192...