RBNZ holds OCR at 3%; says will have to hike it to remove stimulus 'at some stage'

By Bernard Hickey

The Reserve Bank of New Zealand has held the Official Cash Rate (OCR) at 3% as expected, but has commented that it expects to have to remove monetary policy stimulus by increasing the OCR 'at some stage'.

This is in line with its comments at the September Monetary Policy statement when it said the economic outlook had deteriorated and that any increase in the OCR in future would be lower and slower than previously forecast.

Economists have kept their expectations that the Reserve Bank will leave the OCR on hold at 3% until the March 10 decision next year.

“Despite some data turning out weaker than projected, the medium-term outlook for the New Zealand economy remains broadly in line with that assumed at the time of the September Monetary Policy Statement," RBNZ Governor Alan Bollard said.

"Continued household caution has seen consumer spending and housing market activity remain muted, and many firms have become less optimistic about their future prospects," he said.

“While it is appropriate to keep the OCR on hold today, it remains likely that further removal of monetary policy support will be required at some stage.”

The New Zealand dollar blipped up slightly after the statement while wholesale interest rates were broadly unchanged.

Wholesale interest rates have nudged higher over the last 3 weeks from around 3.71% for two year swap rates to 3.82% as some investors begin to fear a resurgence of inflation in coming years in the wake of money printing by the US Federal Reserve and other central banks.

Fixed vs floating?

That is expected to keep banks from further reducing their fixed mortgage rates.

Advertised floating mortgage rates are likely to remain on hold at around 6.2% until at least March next year while the Official Cash Rate is on hold.

The fixed vs floating decision remains a difficult one dependent on the outlook for the OCR and a borrower's personal situation.

The Reserve Bank's current view is the OCR is likely to rise around 1.5% between early 2011 and early 2013, which would imply a floating mortgage rate of around 7.7% by early 2013. 

Advertised two year fixed mortgage rates are currently around 6.7%, which means it's a toss-up decision on which one is cheapest and depends on the speed and size of OCR hikes.

Borrowers who expect the economy to remain weak and the RBNZ to keep rates low would be better off staying floating.

Those who expect a faster and quicker rise in the OCR would be better off fixing.

Your view?

See all mortgage rates here.

Here is the full statement below from the RBNZ.

We will update with more detail and comment through the day.

Reserve Bank Governor Alan Bollard said: “Despite some data turning out weaker than projected, the medium-term outlook for the New Zealand economy remains broadly in line with that assumed at the time of the September Monetary Policy Statement.

“Downside risks to the outlook for global growth continue, with high public and private debt inhibiting recovery in many developed economies. Moreover, it is unclear how further policy support would impact on the outlook for growth in our Western trading partners.

Offsetting this weakness, strong growth continues in China, Australia and emerging Asia. “Domestically, recent data has turned out weaker than projected.

Continued household caution has seen consumer spending and housing market activity remain muted, and many firms have become less optimistic about their future prospects. However, continued high export prices, along with reconstruction and repairs in Canterbury, will support activity over the coming year.

“Overall, continued GDP growth is expected to gradually absorb current surplus capacity over the next few years. Headline inflation is expected to move higher following the recent increase in the rate of GST. The subdued state of domestic demand suggests this inflation spike will have limited impact on medium-term inflation expectations.

“While it is appropriate to keep the OCR on hold today, it remains likely that further removal of monetary policy support will be required at some stage.”  

Here is reaction from economists.

BNZ commented:

There were no surprises in the RBNZ's October OCR review this morning, which was essentially a repeat of the general message from the more comprehensive Monetary Policy Statement issued in September: interest rates are on hold for now but are likely to push higher through 2011. The RBNZ certainly acknowledged the generally disappointing data, but also highlighted that the medium-term outlook for the economy remains broadly in line with the September MPS projections.

These projections implied the OCR would start rising again around March 2011. Today's statement effectively endorses this view – a view that we share. However, we anticipate interest rates to eventually push higher through 2011 than either the RBNZ currently projects or the market currently has priced in.  

ASB commented:

The RBNZ left the OCR on hold at 3.00%, as widely expected. The tone of the statement was also in line with market expectations, with the RBNZ noting that despite some weaker than expected growth outturns recently its medium-term outlook on growth was broadly unchanged. As at the September MPS, the RBNZ expects medium-term inflation expectations will move lower in the face of the spike in headline CPI from various Government charges over the coming year. The RBNZ reiterated that further removal of monetary policy stimulus would likely be required sometime in the future.

The open-ended wording of the statement’s conclusion gives the RBNZ flexibility to start hiking again when appropriate. We continue to expect the RBNZ will keep the OCR on hold until the March 2011 meeting.

ANZ commented:

At the margin we can see a slightly softer tone in today’s assessment. The economic data since September has been "weaker than projected", though it still fits within the spirit of their September forecasts. Sentiment towards the global economy has shifted from "slowing" in September to "downside risks". In addition, the RBNZ now thinks growth is expected to only “gradually” absorb current surplus capacity over the next few years, as opposed to “progressively”. But beyond such semantics, the real message appears to be one of business as usual and waiting patiently on the sidelines. We continue to expect the next move in the OCR to be up, starting from March 2011.

We believe the loss of momentum in the economy over Q2 and Q3 is nearing its end, and signs of a pick-up will start to become evident. The RBNZ made reference to firms becoming less optimistic about their future prospects, whereas yesterday’s National Bank Business Outlook survey showed a rise in the own activity reading. This may well signal a turning point in this regard. We also take comfort from supportive financial conditions, and high commodity prices leading to a record-high terms of trade, which will eventually filter through the economy. We are not saying that the economy is set to boom, rather simply that conditions for improvement are in place. Underlying inflation (excluding government policy changes such as GST increases) has bottomed, and will start to rise, though we expect it to be contained within the target band. But for now the RBNZ clearly has time on its side to wait and assess developments.

The tightening cycle we are looking for next year will be staggered, and the end point for the OCR will be lower compared to past cycles. This partly reflects the positively shaped yield curve and the higher proportion of borrowers on floating and shorter-dated fixed rates, giving the OCR lever more potency. We expect the OCR to reach 4.25 percent by the end of 2011, and rise towards 5.25 percent over 2012. This is modest by historical standards, but more aggressive than current market pricing.

Westpac commented

Given the uncertainty about global conditions, and the fact that the domestic recovery to date hasn't lived up to its early promise, it's understandable that the RBNZ would pause for a while to assess the situation. Moreover, the RBNZ has made some big assumptions as part of its central forecasts: that households will further increase their rates of saving; that inflation expectations will decline even as headline inflation rises above 4%; and that the rise in the terms of trade will only be temporary.

These assumptions will need a lot of accumulated evidence to either prove or disprove. We expect the next OCR hike to be delayed until March, as do most forecasters. That said, we can't ignore the massive improvement in New Zealand's purchasing power resulting from the continued strength in world demand for commodities.

If this has anything like its usual effects on the broader economy, it's hard to see consumers remaining reticent, or wage and price expectations remaining contained, for as long as the RBNZ is assuming. As a result, we expect that by the second half of next year the OCR will be rising further and faster than the RBNZ's current projections.

JP Morgan commented:

RBNZ Governor Alan Bollard this morning left the official cash rate (OCR) at 3% (J.P. Morgan and consensus: no change) as unanimously forecast by all economists surveyed by Bloomberg. Indeed, the poor run of economic data, which has “turned out weaker than projected”, meant there was little chance of a rate hike today. The recovery in New Zealand effectively has stalled; hence, the accompanying statement was suitably downbeat on the domestic economy.

We believe that the RBNZ Governor will leave current policy settings in place for some time in order to encourage a sustainable recovery. The Governor reiterated today that “further removal of monetary policy support would be required at some stage.” Our base case is for the next rate hike to be delivered in March 2011, although we acknowledge the risk that the next move could be delayed if current accommodative policy settings are still required to prop up growth in the New Zealand economy.  

(Updated with detail, Fixed vs Floating section, comments from economists)