No one expects the Official Cash Rate to change on Thursday, but ongoing business confidence issues may get a mention in Governor Orr’s OCR statement

Adrian Orr cartoon by Jacky Carpenter. © interest.co.nz

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.

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12 Comments

I have a different view. If you look at the lack of inflation over the last 5 years you could easily argue that the reserve bank has held the OCR too high. This would have decreased potential growth. They have got away with it due to high headline GDP growth figures, but per capita we haven't really grown at all. If growth is now stalling they must lower the OCR as soon as possible unless they seriously think inflation will appear.
I think it is by no means an easy decision, the reserve bank needs a very good reason to not drop the OCR.

Per capita growth is really driven by micro factors and policy settings, not interest rates. What you've suggested (lowering interest rates) is really just a sugar hit that would do nothing for the fundamental long term health of the economy.

If creating a robust economy was as simple as dumping rates to zero, we wouldn't need a central bank.

They can't just set rates to 0 as it would cause inflation. But conversely if the OCR has no affect on growth, why not set it at 20%?
In theory, lower interest rates allow people to invest and create growth. But if you set them too low the market gets overheated which causes inflation. Ideally the RBNZ should set the rate as low as possible without causing inflation. I think they have failed to do this.

Theory is just that. In real life, low interest rates do not necessarily encourage investment and growth. You need confidence first and foremost. With debt levels at historic highs, no one really wants to (or can afford to) borrow more, regardless of the interest rate. There were many in the 80s that were happy to borrow at 15-20% interest rates because they were confident in the business environment and being able to pay it back. If you offered them millions now at 2% interest they’d probably decline as they wouldn’t have the same confidence. What you need to realise is that interest rates CANNOT stay this low. Why? We are close to peak debt and investors will require the greater risk to be matched by higher rates. Also, most govt debt is now just becoming accumulated interest...ie. it’ll never be paid back. Couple that with multi-trillion-dollar pension funds which need at least 7-8% returns to survive and you have the recipe for higher rates, regardless of what the RBNZ does, short of creating a hyper inflationary collapse. We have simply spent future earnings and we’ll have to pay the price with lower growth, standard of living, etc, for many years to come.

Would the Reserve Bank even consider a move before hitting the top band? They've been sat at or under that lower inflation band for so long now that getting momentum into inflation may not be a bad strategy if they desire some rate normalisation this economic cycle.

I wonder if the volume and value growth in new car sales is a useful indicator for the reserve bank.

Low inflation and business confidence down there is little chance of an increase in interest rates for now. Maybe next year if any remote possibility. A low wage economy will hinder inflationairy pressures. Don't lock in your mortgage rates as there is no hurry!

i see large groups of foreign workers every where keeping wage down all around my area no no chance of wage inflation in NZ . just anounced chinese builders to keep wages down in that sector as well. automation and AI are helping as well. Soon the consumers will be a small group of public sevants and professionals.

I disagree for two reasons:

• domestically pent up wage pressures are significant. If wages are going to rise across nurses, doctors, police, teachers, suppport workers, early childhood, midwives, etc, etc, how can prices not move?

• international interest rates. At some point the interest rate differential that will emerge between the USA and us will rank our exchange rate and when this happens we will start importing inflation. Isn’t one of the reasons we have low inflation because of tradeables? We’ll kiss that good bye.

Monetary policy has an 18 month lag therefore you should be aiming for where you are going to be not where you are. Therefore they should be normalising rates.

I just wonder if a sneaky 0.25% rise may be just the ticket. There’s going to be a dip anyway so why not have six months of calming down some of the excessive froth and giving ourselves a bit more policy leeway for when the Big Crunch hits next year.

Woah there Nic,

0.25% of $243,159,000,000 is $607 Million NZD extra in interest on the total existing mortgage lending https://www.rbnz.govt.nz/statistics/c32

The only way is down once the RB makes a policy error and raises rates too far.

I appreciate that it's a call that would scare a few borrowers, however the reality is that with this months' borrowing numbers out today and another $6,000,000,000 in new lending ttaken out it is plainly obvious that the sheeple cannot be trusted with access to credit and risk sinking the whole ship. Reward the savers for a bit and hopefully they will see us through the down turn - alternative is to build a bigger debt pile for when the market really gets tough. NZ could probably do with a shock because the press and politicians are too ignorant (or too indebted themselves) to communicate a reality. The country needs to start to encourage some personal fiscal discipline even if it requires the stick rather than carrot. Rates will go anyway and I would say that it is better for the reserve bank to take control in the early part of this than lose all control later!