Reserve Bank leaves key monetary settings unchanged and says it will keep conditions stimulatory till confident of achieving 2% inflation and meeting its employment targets

Reserve Bank leaves key monetary settings unchanged and says it will keep conditions stimulatory till confident of achieving 2% inflation and meeting its employment targets
WHEN THE DOVE FLIES: Adrian Orr has remained cautious.

Reserve Bank Governor Adrian Orr has once again confirmed himself as a 'dove', with the central bank announcing unchanged monetary settings.

This means the Official Cash Rate stays at 0.25% and the Large Scale Asset Purchases (money printing) programme remains with a target of $100 billion of bonds to be purchased by June next year.

Recent stronger than expected economic data had led some economists to believe that the RBNZ might signal a move to more 'normalised' monetary settings in the future.

One thing that economists were watching very closely was whether the central bank reintroduced in the latest Monetary Policy Statement (MPS) any forecasts for the future level of the Official Cash Rate. It has not done so.

In his latest statement Orr has noted the recovery in the NZ economy, but said "some temporary factors were currently supporting consumer price inflation and employment".

In the MPS the RBNZ is forecasting that annual inflation will go as high as 2.5% by the middle of this year before falling back to 1.4% by mid-2022.

"The economic outlook ahead remains highly uncertain, determined in large part by any future health-related social restrictions. This ongoing uncertainty is expected to constrain business investment and household spending growth. The [RBNZ Monetary Policy] Committee agreed that inflation and employment would likely remain below its remit targets over the medium term in the absence of prolonged monetary stimulus," Orr said.

"The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained at the 2% per annum target midpoint, and that employment is at or above its maximum sustainable level. Meeting these requirements will necessitate considerable time and patience.

"The Committee agreed that it remains prepared to provide additional monetary stimulus if necessary and noted that the operational work to enable the OCR to be taken negative if required is now completed."

Westpac chief economist Dominick Stephens said the RBNZ "wants to see the whites of the eyes of inflation and employment" before it shifts monetary policy.

"The RBNZ wants to let things run for a while, and is prepared to wear occasional episodes of inflation rising to about 2% in order to be sure that inflation and employment have returned to target sustainably," he said.

This is the announcement from the RBNZ:

The Monetary Policy Committee agreed to maintain the current stimulatory level of monetary settings in order to meet its consumer price inflation and employment remit. The Committee will keep the Official Cash Rate (OCR) at 0.25 percent, and the Large Scale Asset Purchase (LSAP) Programme of up to $100 billion and the Funding for Lending Programme (FLP) operation unchanged.

Global economic activity has increased since the November Monetary Policy Statement. However, this lift in activity has been uneven both between and within countries.

The initiation of global COVID-19 vaccination programmes is positive for future health and economic activity. The Committee agreed, however, that there remains a significant period before widespread immunity is achieved. In the meantime, economic uncertainty will remain heightened as international border restrictions continue.

Economic activity in New Zealand picked up over recent months, in line with the easing of health-related social restrictions. Households and businesses also benefitted from significant fiscal and monetary policy support, bolstering their cash-flow and spending. International prices for New Zealand’s exports also supported export incomes, although the New Zealand dollar exchange rate has offset some of this support.

Some temporary factors were currently supporting consumer price inflation and employment. These one-off factors include higher oil prices, supply disruptions due to trade constraints, the recent suite of supportive fiscal stimulus, and a spending catch-up following the easing of social restrictions.

The economic outlook ahead remains highly uncertain, determined in large part by any future health-related social restrictions. This ongoing uncertainty is expected to constrain business investment and household spending growth. The Committee agreed that inflation and employment would likely remain below its remit targets over the medium term in the absence of prolonged monetary stimulus.

The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained at the 2 percent per annum target midpoint, and that employment is at or above its maximum sustainable level. Meeting these requirements will necessitate considerable time and patience.

The Committee agreed that it remains prepared to provide additional monetary stimulus if necessary and noted that the operational work to enable the OCR to be taken negative if required is now completed.

Summary Record of Meeting

The Committee reviewed recent international and domestic economic developments, and their implications for the outlook for inflation and employment. Members noted the lift in domestic economic activity, as evident across a range of indicators including inflation, employment, household spending, GDP, and asset prices.

The Committee discussed the key factors supporting the pickup in economic activity. Household and business balance sheets have fared considerably better than was anticipated at the start of the pandemic. This is in part due to the responses of monetary and fiscal policy, but also due to a number of other factors, in particular the containment of COVID-19 that has enabled ongoing domestic economic activity. People who arrived in New Zealand during the early stages of the pandemic and subsequently stayed on, are contributing to both housing and broader demand pressures. New Zealand’s commodity export prices and volumes have also remained robust despite the global economic slowdown.

The Committee agreed that several of the factors supporting economic activity are likely to prove temporary. Fiscal policy will continue to support the economy, but its impulse is unlikely to be as strong as last year. In addition, economic uncertainty persists due to the sustained closure of international borders and the manifestation of new strains of the virus. These factors continue to weigh on business confidence and investment intentions.

Several members noted the projected increase in headline inflation can also in part be explained by one-off factors, particularly oil price increases. The Committee agreed that the interaction between the headline, core, and wage inflation, and inflation expectations, will be important in determining the sustainability of inflation pressures in the medium-term.

The Committee noted the labour market has proved more resilient than anticipated at the outset of the pandemic, although unemployment has risen. The Wage Subsidy scheme played an important role in helping businesses maintain employment. However, labour market conditions remain uneven across sectors and regions. Those sectors most reliant on tourism-related business activities continue to lag behind on job opportunities, with this likely to persist as long as international borders remain closed. Some members noted that labour effort is being reallocated to other activities and saw the potential for construction activity to remain strong. The Committee expects to see an ongoing gradual recovery in employment towards its maximum sustainable level.

The Committee noted that although the recovery in economic activity was uneven across countries, the performance of some of New Zealand’s main trading partners, in particular China, has been more resilient than expected. The stronger performance of economies geared more towards global goods demand, which has provided continued support to New Zealand’s commodity exports. However, the gains from higher export commodity prices have been somewhat offset by the stronger New Zealand dollar.

The Committee noted that the spread of more virulent strains of COVID-19 presents an ongoing risk to global economic activity. However, the development of effective COVID-19 vaccines has improved the medium-term economic outlook, helping to reduce uncertainty and boost confidence. Members noted the global economic recovery remains dependent on health outcomes and the success of the COVID-19 vaccine programmes.

The Committee noted that global financial asset prices have been inflated by both fiscal and monetary policy stimulus, and the expectations of the success of the vaccine programmes. Members also noted that long-term sovereign bond yields had increased, in part reflecting greater expected growth and inflation.

The Committee noted that domestic financial conditions remain highly stimulatory, that is, promoting spending and investing. Since the November Statement, international and domestic long-term interest rates have risen, driven by an improved growth and inflation outlook.

However, domestic borrowing rates faced by households and businesses have declined marginally. Members agreed that domestic borrowing costs would need to remain low to achieve the Committee’s objectives.

The Committee discussed the effectiveness of monetary policy settings in delivering the necessary monetary stimulus. The level of Official Cash Rate (OCR) and forward guidance had helped anchor short-term interest rates. The Funding for Lending (FLP) programme had helped keep downward pressure on retail interest rates. The Committee noted that the Large Scale Asset Purchase (LSAP) programme had continued to apply a downward influence on long-term interest rates and provide bond market liquidity.

Members noted the FLP will continue to lower bank funding costs, even if international wholesale borrowing costs rise. The Committee noted that the decline in bank funding costs provides banks with scope to further reduce interest rates for household and businesses. The Committee agreed it expects to see the full pass-through of lower funding costs to borrowing rates, and it will closely monitor progress.

The Committee discussed how monetary policy settings were affecting financial stability. Members noted that monetary policy actions had supported financial stability as they have improved the cashflow positions of households and businesses. The Committee noted that the recent changes to the Bank’s Loan-to-Value Ratio (LVR) requirements occurred to ensure that financial system soundness is maintained.

Overall, the Committee agreed that the risks to the economic outlook are balanced, in large part due to the anticipated prolonged period of monetary stimulus. The Committee reflected on the international experience of central banks following the Global Financial Crisis. The Committee agreed that it was important to be confident about the sustainability of an economic recovery before reducing monetary stimulus. Some members also reflected on the extended period of below-target inflation in many countries, including New Zealand, prior to the pandemic.

The Committee agreed that, in line with its least regrets framework, it would not change the stance of monetary policy until it had confidence that it is sustainably achieving the consumer price inflation and employment objectives. The Committee expects that gaining this confidence will take considerable time and patience. While doing so, the Committee agreed to look through any temporary factors driving prices as required by the Remit, and noted that there will be periods during which inflation will be above the 2 percent target midpoint.

The Committee discussed the range and settings of its monetary policy tools. Members noted that the banking system is operationally ready for negative interest rates. The Committee assessed a negative OCR and the LSAP programme against its Principles for Alternative Monetary Policy. The Committee agreed that it was prepared to lower the OCR to provide additional stimulus if required.

The Committee discussed the LSAP programme and noted that many factors influence domestic long-term bond yields, including expectations for monetary policy, global bond yields, and the economic outlook. The Committee noted staff advice that reduced government bond issuance was placing less upward pressure on New Zealand government bond yields, and that domestic bond markets had continued to function well. Members noted that staff had adjusted purchase volumes since the November Statement, in light of these conditions.

The Committee agreed to continue with the LSAP programme with purchases of up to $100 billion by June 2022. The Committee also endorsed staff continuing to adjust weekly bond purchases as appropriate, taking into account market functioning. The Committee agreed that weekly changes in the LSAP do not represent a change in monetary policy stance.

The Committee agreed that current monetary policy settings were appropriate to achieve its inflation and employment remit. The Committee agreed it would maintain monetary stimulus until it is confident that consumer price inflation will be sustained around the 2 percent target midpoint and employment is at or above its maximum sustainable level. The Committee expects a prolonged period of time to pass before these conditions are met.

On Wednesday 24 February, the Committee reached a consensus to:

  • hold the OCR at 0.25 percent;
  • maintain the existing LSAP programme of a maximum of $100 billion by June 2022; and
  • maintain the existing FLP conditions.

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52 Comments

11
up

Did anyone actually expect anything else?

Reading off that, those of you hoping for any type of monetary policy tightening in the next 18 months will be disappointed. I suspect Orr won't touch the OCR until the other central banks start rising unfortunately.

Recklessly and obscenely dovish.

The Reserve Bank has left the Official Cash Rate on hold at 0.25 per cent in its first Monetary Policy Statement for the year.

In the statement, released at 2pm, Reserve Bank Governor Adrian Orr said prolonged monetary stimulus was necessary.

Brutus, what do you want him to do instead??Start putting rates up, push out dollar to unreasonable highs?? Business confidence is still not right with lockdowns, covid. I believe the pain is still to come as we had massive bounce back from money people had saved for holidays last year. Not sure if spending stays the same.

There is much wider economic factors in play here then Auckland house prices!!!

What he should have done is not drop the OCR and the LVRs

I'm keen to know what sort of holidays these people go on, because the amount of Aston Martins, Lambos, Teslas and Porches driving around Wellington recently is staggering.

What will be staggering is when a lot of them will be for sale next year. We all rich

Rates will have zero effect on a pandemic/health driven economic contraction from here. It's pushing on a string with respect with the bits that they hope to affect ( real economy genuine business activity, which will be driven by Bloomfield and fiscal policy), but having massive detrimental effect on asset price inflation.

We'll see what happens. Maybe their hand will be forced.

"Paid either way"

23
up

"People who arrived in New Zealand during the early stages of the pandemic and subsequently stayed on, are contributing to both housing and broader demand pressures."
What a load of bollocks - the dangerous over-inflating of the NZ housing Ponzi, which is also jeopardizing the ultimate stability and soundness of the NZ financial system - which, by the way, is fundamental part of the RBNZ's remit that Orr is so studiously ignoring) is mostly and directly caused by the ongoing reckless ultra-loose monetary settings enforced by Orr & co.
It is time for Orr to go before any further damage is done to the NZ financial system.

nah you've got it all wrong. A less stable bigger housing market equals too-big-to-fail equals government intervention which equals stability. Maybe the RBNZ will remove non tradable inflation goods from the CPI basket. Maybe they'll say "we'll let inflation run hot for blah blah whatever reason" Whatever the case we're on an express elevator to financial repression and exponentially decaying interest rates. https://youtu.be/bHzov33tgfg

The Central Bank 'Wealth Effect' nutters will see it through like some strange cult clinging to its unfathomable beliefs. This is a cult of the Jim Jones variety I feel. The writing is on the wall, we are being made to drink the Kool-Aid.

The Central Bank 'Wealth Effect' nutters will see it through like some strange cult clinging to its unfathomable beliefs

The wealth effect does work. One of my clients was producing and marketing high-end home theater components to the U.S. Sales were off the hook up until the GFC then dropped off a cliff and never really recovered as now consumers are cost driven.

'The wealth effect does work......Sales were off the hook up until the GFC then dropped off a cliff and never really recovered'

So sales have never recovered despite all the QE and interest rate suppression intended to drive up asset prices and create a 'wealth effect' which apparently turns people into powered-up spenders.

Very dovish, and house prices are taking off in Australia now as well.

11
up

There's so much one could pick out of that Statement to suggest that they don't really have a clue as to what to do next, except more of what had already failed to work, and throw in some extra praying - sorry, confidence - that something; anything will happen to change the inevitable.
But there's one thing they are honest and right about it's:

" The economic outlook ahead remains highly uncertain"

As I suggested a bit back, there are no right answers now. Our fate lies in the hands of the poor decisions they have already made.

Kiwi dollar up on an uber dovish statement.

Markets have called his bluff and believe he will be forced to hike later.

Interesting, isn't it?
Things aren't working how they're *supposed* to anymore. There's a kind of entropy at play... there are holes appearing in the edifice of 'finance' with increasing regularity.

Lack of confidence in Orr and Robertson = lack of confidence in currency

R Kerr picked a dovish statement for currency reasons, but as you say they aren't buying it!

Exactly - dollar UP. The markets are 'looking thru Orr' as he is 'looking thru' factual inflation (and massive hidden inflation of our no. 1 cost in life - a house.)

So mortgage interest rates will stay the same or possibly dip in the short term?

Stay the same for short term rates, long term rates (5 year) will slowly climb.

Will be very tempting to lock in 3% for 5years if that's still on offer when we are due for refixing.

That's what I'm planning. There is too much upside not to take 3% for 5 years

Me too, rolls over in May

Not dovish enough to change the market and the swap curve will continue steepening. I think this is exactly what the RBNZ wanted with the market not reacting too much one way or the other.

mmmm . . .
Same old same old for housing.
Housing still relatively hot . . . . RBNZ to introduce LVRs but by default banks have already effectively introduced these (I feel banks did this informally in collusion with RBNZ).
OCR and interest rates seeming to be continuing at their low.
Government policies on housing supply proving to be failures.
Looks like it is to be the market will be left to control the housing market . . . with the only possible positive likely is that house prices may be actually be recognised as being overinflated. Reports (e.g. Tony Alexander survey of both REA and mortgage brokers) of less investor interest may support this.

A statement more for the back end of the year of the Ox.

Break money, break people, `kick the can` till there is a central bank digital currency with a smart contract layer and everyone has their only account there. Money becomes contractual in time, purpose, and control at the whim of the governance of the day.

Have to kick this can 4-5 years more though, and break more stuff, to bring us this utopian dream. Think they will be lucky to get past Q3.

Funny how Powell said exactly the same thing today....But I don't understand? Housing prices are up up up ? How could this be? What a load of **** with the financially illiterates smiling all the way to ruin....Don't kid yourself folks this fool will take the OCR negative without a doubt and coupled with inflation pressures they will take your purchasing power away in real terms.The goal here is to collapse the dollar and import inflation. HEY but you still have unrealised gains in housing! UP UP UP

See that bond market doesn't take his crap talk

The next 12 months in the property market will probably pin people back into their seats with the speed of growth. Triple tailwind of RBNZ inertia, reopening across the global economy and normalisation of border measures will catapult New Zealand property higher.

Serious question - why has the RBNZ not been able to meet it's inflation target for over a decade? Do their tools not work, or are they just not using enough of them?

Lack of velocity and wage inflation main contributor, wage index has decreased for the last decade. People spending more on credit with consumption diminishing as debt increases.

Not really answering the question though - is that a scenario where a lower OCR and more bond buying would lead to higher inflation?

Hypothetically yes since you are increasing the broad money supply of M2 without a productive economy chasing finite goods. Inflationary forces already in play....crude oil up 26% YTD ( look at the pumps), lumber 16%, canola oil 32%, sugar 19%, copper 19% ......the main concern and the obvious is the money has been directed to asset inflation which is not part of core CPI.

And no wage inflation. Yeah right we go up 20% in 3 year on minimum wage. It's just all the magic they do with numbers.

Minimum wage increase doesnt automatically lift all wages like policy wonks imagine it would

RBNZ realised they ARE the tools

Well, yeah, we know it's not going to produce the stated aims, but at least in the meantime we can remove land from our CPI measure, "look through" any brief instances of inflation above what we state as optimal, and keep inflating land prices - and thus our portfolio wealth.

He mentioned equity markets a good investment...NZ third most expensive equity market in the world and more expensive than the US on a CAPE. Good advise !

Oh to be a fly on the wall. I suspect Orr and the other RBNZ officials present a number of graphs to the outsiders on the committee who make suitable noises. Orr might adjust one or two items in his pre-prepared statement and that's it. Well paid Labour appointed committee members who are unlikely to change substantially what Orr has already decided.
"The Committee noted that the recent changes to the Bank’s Loan-to-Value Ratio (LVR) requirements occurred to ensure that financial system soundness is maintained." so no past emergency monetary policy committee meeting on the re-introducton forwith of the LVR, like its introduction. Perhaps LVR has nothing to do with monetary policy so there is just a passing reference to it. This monetary policy committee is a talk fest with no teeth. Doesn't pay to rock the boat. Might loose their privileged position.

RBNZ should dial down the OCR to support the economy since it knew the factors supporting the upside of the economy are transient. Complacency will only mean the data lag will come back to bite them in due time.

The target OCR should be dial down by at least 10 to 15 basis points to closer match what's happening across the ditch- their economy is booming right now (AU-OCR 0.1%). It's better to turn it down a now than to be forced to crush it later.

Thank Christ I just accepted a remote working job over one physically based here.

Haere Ra as soon as borders open up. Life is too short for this sh*thole. Let's keep moving!

Good for you. Plenty of others looking to do the same

Here here, if you are young and/or high paid/productive, this countries government declared you as an undesirable. I am also thinking about leaving, the new tax rate will affect me and limit my ability to buy/build a single house, meanwhile those speculating on property with highly leveraged portfolios are absolutely raking it in. A guy I know who has been doing it for 8 years now just bought his second ferrari.

Unbelievable, I don't think Orr is a dumb person, sooo,
1) does he really not see that the settings are far, far, far too stimulatory?
2) if he does, why does he not act to change the settings (FLP, LSAP, OCR)

Now you are asking the same questions I was last year when they proposed removing the LVRs.

He must be taking orders from someone or have vested interests. Really I can't see any other explanation, him and Bascand are as reckless as they come to the financial system of this country... you know, that one they are supposed to protect. Add to that they are tearing apart the social fabric of the country in cohoots with the governments non existent housing policies.

They have to be taking orders from their masters. Orr Bascand and Co appear to sweat bullets when questioned by Jenee and other journos. Also Orrs attack on journos for focusing on housing 'clickbait' instead of unemployment - as if RBNZ gets any say on what is reported on

I don't know what it'd take for Orr to lift rates in this debt based ponzi. Money will turn to toilet paper before peoples eyes before that happens