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Reserve Bank leaves Official Cash Rate unchanged at 1.75%; No change to rates seen before 2021; Next move 'up or down'

Reserve Bank leaves Official Cash Rate unchanged at 1.75%; No change to rates seen before 2021; Next move 'up or down'
Adrian Orr the dove: Illustration by Jacky Carpenter

The Reserve Bank has left the Official Cash Rate at 1.75% as widely expected and has now pushed out any rate changes till 2021 at the earliest.

Additionally, in the expected 'dovish' shift in language the central bank has reinstated the view that the next move could be up or down. 

The OCR has been at 1.75% since November 2016.

In the key forecasts contained in the new Monetary Policy Statement the RBNZ has pushed back the time it expects inflation to meet its explicit target of 2% from December 2018 to December 2020. So, it now says inflation will be below that mark for two years longer than earlier forecast. 

Despite being well off the mark with its September quarter GDP pick (it picked 0.7% growth while the actual figure was just 0.3%) the RBNZ has retained confidence the economy will keep on trucking in the short term and it has increased its pick for December 2018 GDP to 0.8% from 0.5% previously.

The timing of the first OCR move has now been moved forward by six months to early 2021. 

The forecast is still for the first move to be a rise and perhaps this is why the Kiwi dollar responded to the announcement by rising sharply by over half a cent to above US68c initially and then continuing to push up towards US68.5c - a gain of more than 1c on the day. This perhaps signals that at least some in the marketplace were expecting the RBNZ might forecast a rate cut.

Wednesday's OCR decision was the first one to be made at the new timing of 2pm (previously 9am on Thursdays) ahead of the introduction of a new formal committee structure for setting the OCR that will be in place for the May OCR review.

Here is the statement from RBNZ Governor Adrian Orr:

The Official Cash Rate (OCR) remains at 1.75 percent. We expect to keep the OCR at this level through 2019 and 2020. The direction of our next OCR move could be up or down.

Employment is near its maximum sustainable level. However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy.

Trading-partner growth is expected to further moderate in 2019 and global commodity prices have already softened, reducing the tailwind that New Zealand economic activity has benefited from. The risk of a sharper downturn in trading-partner growth has also heightened over recent months.

Despite the weaker global impetus, we expect low interest rates and government spending to support a pick-up in New Zealand’s GDP growth over 2019. Low interest rates, and continued employment growth, should support household spending and business investment. Government spending on infrastructure and housing also supports domestic demand.

As capacity pressures build, consumer price inflation is expected to rise to around the mid-point of our target range at 2 percent.

There are upside and downside risks to this outlook. A more pronounced global downturn could weigh on domestic demand, but inflation could rise faster if firms pass on cost increases to prices to a greater extent.

We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


CPI of 1.9% = computer says no (change)

Nobody's listening.

Your comment puts paid to that claim.

Surely the RBNZ are - obviously they've thrown away NZSIM and have gone with HeavyG's model.

Its funny because his model is dependent on RBNZ actions. The thing he can't see (because he hasn't thought about it for more than 10 seconds) is that the reason that CPI is at 2% and stable is because of RBNZ actions. I.e if he was just chasing inflation around with his model, things would be all over the show. Like I said earlier, his method would increase volatility, not decrease it.

The reason he thinks his model works, is because the RBNZ has already done the work for him. A world without them would have inflation all over the show, he would just enhance it.

I already provided an example of when the RBNZ screwed up. Between March and July 2014 RBNZ increased OCR by 1% despite CPI being below 2% target during this period (my model would not have increased OCR).

Resulted in CPI going below 1% in December 2014 and not coming back into the 1-3% target range until December 2016.

2 years of failure for an organisation that has 1 job. 2 years of borrowers getting screwed for no reason and a brake being placed on the economy. I don't know of many people pulling $600k a year and who don't do their job for 2 years.


But we established yesterday that your 'model' would have pushed up rates even sooner - when (headline) inflation reached ~4% in 2011.

Irregardless. You misunderstand lala's point. Hell, you seem to miss every point.
Inflation targeting is an expectations based approach and inflation isn't some exogenous annoyance - Ya don't just pull the lever when something reaches a measured threshold.

When you say "expectations based approach" you really mean "guess work". My point is the RBNZ is shit at guessing as the example highlights. A model based on known data, albeit historic, would've done a better job than the RBNZ.

You really have no idea, do you.

Constructive comment, Nymad. Right up there.

"A model based on known data, albeit historic, would've done a better job than the RBNZ."

For the benefit of all of you.

And this. Just bear in mind it will be a bit tricky to understand if you believe HeavyG's comments.

But. Hey. If you guys all want to just trundle along in willful ignorance about how things are actually done, go ahead.
Just don't expect anyone to take your comments seriously.

“You literally have no idea, do you”

The type of reply one posts when they have no counterpoint whatsoever.

As an aside, nymad you are so the kinda guy to use irregardless instead of regardless. And inflation is an exogenous annoyance for the RBNZ. You just wanted to use the word exogenous.


'We've decided to keep the patient on life support a little longer and pray to God that someone comes up with a cure. If we operate now, the patient will surely die following an uneducated overdose of household credit.'

by Nic Johnson | Thu, 27/09/2018 - 09:34

"Q3 next year rates go up when Governor Orr can no longer 'look through' inflation. below the 2% band range my arse!"

Still confident, Nic?

I believe its clueless, not confident.

Happy to admit I was wrong, we are in much deeper trouble than I thought we were in September. Since then we've had Q3 data for GDP massively undershoot, Australian house prices really starting to collapse and Auckland appears to be following and is largely unsellable at current prices with a rate of sales that means there is already 7-8 months of stock available. Unemployment rose sharply in Q4 - 3.9 - 4.3% (I didn't see that happening for another 6-9 months) but it is what happened to Ireland at the start of their property collapse in 2007. GDP numbers at the end of march will be interesting reading for Q4.

Sadly, I think we've entered our downturn earlier than anticipated and with no room to cut rates, but they will cut now when the real estate sector and banks start bleating by the middle of the year.

Good on you for acknowledging that you'll be wrong on that prediction. But judging by the rest of your comment, you're not yet ready to do the same regarding your prediction that NZ will be in full blown recession in the first half of this year?

I'm pretty bearish on both Australia, New Zealand and the banks that govern them both.


FYI, there are likely to be more properties listed for sale if ring fencing rules come in. Depends on how it is phased in. Somewhere between zero and 116,000. Even 20% of the maximum number is over 23,000 ...

If a lot of owners are making cash contributions, and they see property prices falling thereby changing their future property price expectations and they are highly leveraged, these owners may choose to sell. Furthermore imagine if these property owners are about to go from interest only financing to P&I financing - the potential cashflow drain can be large. And some property investors own 1-3 investment properties ...

Combine that with higher unemployment rate might mean that some owner occupiers who bought in Auckland in the last 2 years or so might struggle to maintain the debt servicing payments ... Vulnerable households are those where the main income earner in the household is reliant upon the real estate industry such developers, builders, tradies, real estate agents, property mentors, property accountant specialists, property lawyer specialists, building supplies retailers, home furniture retailers, etc


Sounds like Ireland to me.

The number of people who have chosen to buy with borrowed money to lose income on their asset is quite astonishing really. But it did help to keep the bankers dreams alive as they 'purchased the securities' (banks don't make loans, they buy securities) against of all that leveraged speculation. What were people thinking, that house prices would always go up? That they would continue to double every ten years? Who was telling them this?

I wonder where the 'massive que' has disappeared too. Still 7 of the 10 Kiwi-builds in Wanaka on the market!


Yes - he is one of property market commentators who have been influential.

These are some reasons given in the mainstream media, property market commentators, property market promoters, bank lending promoters masking as bank economists, real estate agents, property market mentors & other sources as to why property prices will not fall by much:

1) during the GFC, house prices in Auckland fell only 7-10%
2) over the past 50 years, house prices in Auckland have averaged 7.2% per annum (or commonly referred to as house prices doubling every 10 years). This trend can be expected to continue into the future
3) there is a shortage of housing in Auckland, so property prices won't fall by much
4) there is a growing population which means that there will be more demand for houses
5) we have inward immigration which means more demand for houses
6) interest rates are supportive of house prices
7) We mustn't forget either the vested interests in ongoing stability. No government, central bank or trading bank with mortgage exposure wants materially lower house prices. Nor does an incumbent Beehive want falling house prices going into an election campaign
8) the economy is doing well, with low unemployment
9) there has been insufficient construction of new builds to meet the housing shortage
10) there are high construction costs to building a house. House prices cannot fall below their construction cost.
11) people don't sell their houses at a loss
12) continued inflation means that house prices will continue to rise in the future
13) property market participants & commentators who have been correct in their predictions about recent property price trends have more credibility and hence their predictions of upward prices are believed by a wider audience.
14) previous warnings about a house price crash have been wrong - property prices have continued rising upward significantly since these warnings were given, so there is little reason to believe these warnings.

These reasons and the fact that:
1) Auckland property prices have continued to keep rising in recent years fueled by fear of missing out
2) Auckland property prices have not fallen by much in the past has given people the continued confidence to buy.

These beliefs supported by upward prices (and resulting positive price feedback loop) has caused property prices to rise higher and higher. This continues until, at some stage they reach an unsustainable price level.

Some sources for your reference:


P.S the Irish property price collapse came as a result of bank wholesale funding drying up. The Irish banks were reliant upon a wholesale funding model. As credit dried up, the property sector cut jobs, leading to a recession in the economy, leading to unemployment, leading to inability of leveraged property owners to maintain debt service.
Unemployment in the property sector led to falling revenues in the consumer discretionary sector (retailing of all sorts, clothes, restaurants, cars, etc) which led to more unemployment which led to more leveraged property owners unable to maintain their debt service.

The NZ banks are reliant upon a wholesale funding model, but not to the degree of the Irish banks.


Just read that ring fencing, if passed, will be fully effective 1 April 2019 for the 2019/2020 tax year (i.e not phased in over time)

This could be the trigger for a lot of negatively geared property investors to start selling. Especially in light of changed expectations of capital gains. If little or no capital gains are expected, and there are no tax benefits, then property investors might start asking themselves, why are they continuing to fund the property investment from their own household income.

1) high income earners who bought negatively cashflow property to reduce their tax
2) capital gain oriented property investors who bought negative cashflow properties as they expected capital gains

Furthermore, there may be some marginally cashflow positive property investors may now be expecting little or no capital gain.

All of these above may be further financially pressured if they financed their property purchase with an interest only loan to find out that it is suddenly going onto P&I terms.


Understatement of the century

It’s going to cost you plenty Nic but it’s for a great cause and tax deductible!

That was a great bet.

we pay some one 600k+ a year for this, 'Next move 'up or down'' Tell you want I will do it for 400k, and smile more.
Jeepers the inflation should have arrived by now, the employment figures look good, councils are spending money into the economy like drunken sailors.
So wheres the growth why are banks and institutional investors buying 10 year government bonds at 14.5 basis points above inflation? they know something is very wrong.

'MS. JOHNSON. Relative to the kinds of options that these gentlemen have put on the table today, I think there would be a lot of agreement that there was one thing the Bank of Japan did that was very wrong. Namely, at each step along the way they portrayed the situation as abnormal and an emergency, and they indicated that the actions they were taking made them uncomfortable and that it was their intent to return to more-normal operations absolutely as soon as possible.

But I think the Japanese limited the effectiveness of their actions by this overtone they used to characterize the steps they were taking as they announced them. [emphasis added]

This right here is the ZIRP trap (or QE trap). If the economy doesn’t perform, you can never say that. As a central banker, you can never admit that you are uncomfortable with ZIRP or QE. Worse, as the evidence piles up that it hasn’t worked, again, the very fact you are at the ZLB or endorsing “extraordinary” policies like QE that are attempts to overcome it, the more forcefully you have to commit to what doesn’t

Nobody pays attention to the Japan case. Most of the arguments are about how the West is different (and in many ways it is). But the West thinks it can have its cake (forever bubble) and the opportunity to eat it too (QE and endless money printing). The consensus is that debt and asset deflation cannot happen...ever.

I'll do it for $350k but probably not smile any more.

$350k, and i'll pay for my own PA ( A nice bit of eyecandy ) to distract the viewers as I quietly mutter "don't spook the punters, don't spook the punters"

I will do it for the price of a a poor neighborhood. (Beat that AndrewJ)...

I cannot say fairer than that.....If the market falls, I win as I have lost nuffin, but a RBNZ donation for never working again.

If the market gains, I will have the poor rental position can be supported by Winz.

We all Winz in the end.

Any other offers can be negotiated, with my best wishes...

(Note...No Real Estate Agents costs involved, so 4% saving)

but I will legalise cannabis so long as we can tax it, everyone will be happy, but it will cost 100k more pa.

Negotiating something one has weed on, is taking the land values beyond a joke. AndrewJ.

We could split the difference and paper over the cracks, gang up on all the others, buy a large plot and grow our own crops, sell at the stable door after the horse has bolted and claim a tax deduction, on the parts that the tractor needed, milk the Taxpayer for more money, cream off the best of the crop and smoke outside till the cows come home. Claim benefits for Medicinal Cannabis, charge like a wounded bull. And give as good as we get.
How much is land your way.....Can I get a loan against my House, or will I have to use folding Money, leveraged up to the hilt to get this new Business running. We might not score for a few years, as many more rises may have to be overcome, until the Community takes to the plot and the Pot boileth over..

Are Gang Headquarters able to be built, what is Planning like in your neck of the woods, would a leaky home be transferable, from here, is roading an issue, or is it a bit rocky. Will a get out of jail free card, come with this monopoly, cos I hear it ain't legallally binding as yet...No contracts on my life or yours.

Or we could just forget about the whole thng and keep on, keeping on, in our own interests....and steer clear of another fiasco hedging our bets, business wise....Orr not. Orr just Maybe.

we can convert my vineyard, send cash.

I will drink to that....Anyone else in, shares are negotiable. Capital Gain assured, by business rules...yay.

Did anyone think they'd do anything different? After all they're in the business of making sure everyone is enslaved into paying exorbitant amounts of their income servicing debt.

Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan

I guess its the do nothing option. Expect more 3.99% deals as banks burn a little margin to collect the better class of client (not stupidly in debt).

Their decision and guidance is data dependent. If in doubt or unclear, then isn't the best course of action to wait for more economic data on the state of the economy, inflation etc?

Or should they act first / signal first and then reverse course and lose credibility in the eyes of the market participants, etc?

This is an important statistic used by the RBNZ in their econometric models.

"The econometric models at the Reserve Bank focus on a key driver of New Zealand household confidence and consumption: house prices. When prices are strong the housing market runs hot with demand and new housing investments get under way. And when New Zealanders buy a house, they also buy fixtures, fittings, and furnishings. .... This relationship between house prices and household consumption is much closer in New Zealand than it is in other countries. As New Zealanders have few assets of other types, when house prices go up we feel wealthier and spend freely. When we can afford it, we are inclined to put more money into home improvements, holiday houses, investor housing or property funds" - page 17, Crisis - by Alan Bollard

Phew !! The NZD strengthened after the announcement....another selling opportunity.

Roger will be thrilled!

they really are makeing saving hard why would anyone put there money in a bank these days there is no insentive at all

People put their money in the bank because they're too afraid/lazy to use it to setup a productive business

It's not like money in NZ has been flowing into productive business in NZ over the last decade.

Wonderful news


And your evidence is?

The article above, you should read it