The Reserve Bank of New Zealand has left the Official Cash Rate on hold at 2.5% and again pledged to leave it on hold until the middle of 2010. The global economy and the New Zealand economy were recovering, but sustained growth overseas was dependent on continued fiscal and monetary support and vulnerable to weak financial sectors, the bank said. (Update 4 includes links to special report video. Update 5 includes ANZ reaction.) New Zealand inflation remained within the bank's target range and the removal of monetary stimulus was not needed until the middle of 2010, Governor Bollard said. This was in line with the bank's December announcement and economist expectations. The New Zealand dollar fell marginally to 70.3 USc in the first 10 minutes of trade after the announcement before rebounding to 70.6 USc by 9.40am. See here for a special report on the Reserve Bank's decision and how the RBNZ is receiving monetary policy help from a number of outside sources. Watch on YouTube here. My view: The Reserve Bank has delivered on expectations for a 'steady as she goes' statement that leaves enough wiggle room for rate hikes to start from April 29, June 10, or July 29. Luckily for Reserve Bank Governor Alan Bollard, he is able to rely on tighter bank lending and higher market interest rates to start sucking the punch out of the bowl before the party gets too rowdy. Bollard can also afford to keep his powder dry because inflation is not a problem yet and the initial signs of a strong recovery seen late last year have faded somewhat both locally and globally. Reserve Bank data on credit card billings for December, which are the first useful figures from the key Christmas retail sales season, show sales fell 1.3% on a seasonally adjusted basis. Mortgage approvals data up until last Friday show bank lending is starting to dry up again. Lending approvals by value, which are a useful indicator of what will happen in the next couple of months in the housing market, fell 2.3% to NZ$645.8 million in the week to January 23 from the same week a year ago. This is the first year-on-year fall since April last year. That is less than half the lending going on at the peak of the boom. The Reserve Bank's new rules on prudential liquidity are forcing the banks to pay more for their funds because they are having to raise more money for longer terms and more money from local savers, instead of going to international markets for cheap short term funds. Also, banks globally are having to put aside more of their own capital to back lending, which is making them more careful before they lend. The housing market's recovery of the last 9 months is running out of steam as this lending dries up and affordability hits the doledrums again. This, in turn, is keeping a lid on any consumer spending excitement. Various local inflationary influences are also being dampened through other means. Local councils are under the thumb from central government to avoid big local rate increases and some state-owned power companies have frozen their price increases. There remains a big risk of a double dip recession in the United States, Japan and Europe as the combined weight of heavy public debt and weak banking systems restrict lending and push up interest rates. The mortgage market is also gradually shifting in New Zealand towards variable mortgage rates rather than fixed mortgage rates. That's because variable rates are now consistently lower than all but the six month rates, which is such a short term it may as well be variable. This could be a historic shift that gives the Reserve Bank more monetary policy potency, similar to that enjoyed by the Reserve Bank of Australia. The proportion of New Zealand borrowers on variable rates has almost doubled to 25% in the last two years, meaning they will feel the full effects of an OCR hike immediately. Those refixing for what was the most popular term of two years have already seen that average bank rate rise from 5.92% in February last year to around 7.2% now. Interest rates are rising globally too as investors realise the decision through 2009 to shift private debt to the public sector has not removed the debt. It still has to be serviced and eventually repaid, which is increasing the risk of sovereign defaults. Deleveraging is inevitable and it is a mighty powerful force, almost as powerful as compounding interest. It is actually a different form of the same thing. The Reserve Bank may have held the OCR, but the pressure is on from other sources to hike interest rates and reduce lending growth. Here is ASB economist Nick Tuffley's initial reaction.
As expected, the RBNZ trod a very similar line to the December statement (even going so far as to specifically note that). The key point was that events have kept the RBNZ comfortable with its assessment that "around the middle of 2010" is the appropriate timing to start unwinding the stimulus. There was no market reaction. We continue to expect the RBNZ to start removing the stimulus in April: the medium-term inflation outlook will appear less "comfortable" over time. However, as we detail at the end of this note (please see "OCR Outlook", below), we now expect the pace of OCR increases to be of 25bp instead of 50bp in the initial meetings. Some of the urgency for rapid tightening has dissipated with signs that the housing market's rise is ending. But a key factor behind our view change is that the relationship between the OCR and lending rates is likely to be a lot firmer than we previously assessed. Early OCR increases risk being passed through fully rather than partially, given that the retail deposit war continues to rage intensely and wholesale funding costs are no longer benefiting from falling credit premiums. The likelihood of a large wedge remaining between the OCR and bank funding costs "“ even after the OCR has risen to more normal levels "“ also suggests a peak OCR of 5% will be sufficient to remove the stimulus short-term rates provide. Previously, we assumed the OCR would reach 5.5% Our view on the timing and magnitude of future OCR moves is fairly close to current market pricing. The RBNZ Governor is speaking tomorrow afternoon on "The crisis and monetary policy: what we learned and where we are going." Given the "where are we going" aspect, it is possible the RBNZ talks specifically about its exit strategy. Last year the Governor implied 25bp hikes wouldn't cut the mustard: the speech may give insights into whether the RBNZ has changed its mind or not. Our new view is that 25bp hikes will pack sufficient heat.Here is the reaction from ANZ economist Khoon Goh:
Today's OCR assessment had something for everyone, and was clearly designed to have minimal impact on the market. Judging by the market reaction, with swaps and the NZD largely unmoved, the RBNZ has been successful and can give themselves a pat on the back. The upcoming dataflow will remain critical as would be expected, and particularly relative to the RBNZ's December projections. We continue to pay close attention to credit growth trends. Central banking in 2010 appears relatively straight forward: if credit growth picks up, remove excess liquidity. If it remains stagnant, maintain supportive conditions.Here is the full statement below from the Reserve Bank.
OCR unchanged at 2.5 percent The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5 percent. Reserve Bank Governor Alan Bollard said: "The outlook for the New Zealand economy remains consistent with the projections underlying the December Monetary Policy Statement. "Global activity continues to recover, helping push New Zealand's export commodity prices higher. Economic growth is most apparent in China, Australia, and emerging Asia. However, sustained growth throughout our trading partners is not assured, with many still facing impaired financial sectors and overall activity still reliant on policy support. "Similarly, the New Zealand economy continues to recover. Policy stimulus and improving export earnings have seen a pickup in household spending. That said, households remain cautious, with credit growth subdued. Business spending remains weak. "Annual CPI inflation is currently at the centre of the target band, and is expected to track comfortably within the band over the medium term. "The economy is being assisted by both monetary and fiscal policy support. As growth becomes self sustaining, fiscal consolidation would help reduce the work that monetary policy might otherwise need to do. "If the economy continues to recover in line with our December projections, we would expect to begin removing policy stimulus around the middle of 2010."