Reserve Bank Governor Adrian Orr has another easy Official Cash Rate (OCR) decision on his hands this week, with all major bank economists picking no change.
But looming issues, such as low business confidence and ongoing Mycoplasma Bovis eradication concerns, may see the OCR remaining on hold for longer than previously expected.
When announcing the OCR would remain on hold at 1.75% in May, Orr said it was the “easiest decision I have had to make in 11 and a half years.”
There are no expectations that the OCR will be moved up or down on Thursday and economists say it’s likely Orr will retain his clear, consistent message that the central bank will remain cautious until inflation starts to pick up.
Despite this, there will be much interest in what Orr has to say in his OCR press release.
ASB chief economist Nick Tuffley says the risks are slightly more skewed towards lower growth and, therefore, interest rates remaining on hold for longer.
Last week, economic growth figures showed GDP grew by 0.5% in the first quarter of this year, 0.2% below Reserve Bank forecasts.
Tuffley says there could be more bad news still to come on that front.
“Locally, pessimistic business confidence and uncertainties from the ongoing Mycoplasma Bovis eradication efforts could slow growth relative to the strong fundamentals still in place,” he says.
Issues around trade protectionism, given the prospects of a trade war between China and the US, may also receive a mention in Orr’s statement.
Inflation will continue to be a key factor in the Reserve Bank’s OCR judgment.
In May, the Central Bank sent a very clear message that it is determined to meet its inflation target, with an OCR move up or down equally likely.
“The direction of our next move is equally balanced, up or down. Only time and events will tell,” Orr said in the Monetary Policy Statement.
ANZ Chief Economist Sharon Zollner says there are reasons to believe an inflation pick-up is on the way, given upcoming minimum wage increases and an overall lift in global inflation.
“But economic momentum is gradually softening,” she says, adding that downside risks have increased, and it will be difficult to achieve above-trend economic growth from here.
“In this environment, we see inflation increasing only very gradually.”
Eyes on the prize
Orr’s decision to have the policy guidance paragraph at the top of the OCR press release sent economists into a bit of a spin in May.
Under other Reserve Bank Governors, expectations for what would happen next with the OCR – for example, “monetary policy will remain accommodative for a considerable period” – was always at the bottom of the press release.
Orr’s wording and his comment that the next OCR move could be “up or down” was also new in its simplicity.
But Westpac chief economist Dominick Stephens says this is a “red herring” and Orr may well choose different words to express the Reserve Bank’s on hold stance.
“The Reserve Bank is trying to avoid formulaic communications. It wants markets to read each statement individually, rather than making side-by-side comparisons between the exact wording of two statements,” he says.
“This means that, unlike most central banks, the Reserve Bank might change the wording of its policy guidance paragraph even if its views have not changed.”
He says it's not the words the market should be focusing on, but the overall meaning of the statement.
ANZ pushes back forecast for OCR hike
ANZ's economists have changed their forecast for when the OCR will increase to November next year from August 2019. The main reason is due to a softer outlook for GDP growth and a more gradual increase in inflation.
“There are risks on both sides of the ledger. But on balance, we think cost pressures – especially wage costs – will push inflation higher and that the OCR will eventually rise,” chief economist Sharon Zollner says.
“That said, with forecast hikes sitting very late in the economic cycle, there are decent odds they may not happen at all.”
Zollner says the unclear implications for New Zealand of a global trade war also play a part in ANZ’s updated OCR pick.