RBNZ holds OCR at 2.5% for now; relaxed on underlying inflation in middle of 1-3% target band; future OCR hikes needed, but only if global fallout mild

RBNZ holds OCR at 2.5% for now; relaxed on underlying inflation in middle of 1-3% target band; future OCR hikes needed, but only if global fallout mild

By Bernard Hickey

The Reserve Bank has held the Official Cash Rate at a record low 2.5% and has signalled the OCR is likely to rise if a global slowdown had only a mild impact on the New Zealand economy.

The decision to hold was widely expected by economists, who have shifted out their forecasts for the first hike in the OCR to mid 2012 from early 2012 in the last week. See Alex Tarrant’s article from Tuesday here.

Reserve Bank Governor Alan Bollard said underlying inflation was settling near the middle of the bank’s 1-3% target band.

“Given the ongoing global economic and financial risks, it remains prudent to continue to keep the OCR on hold at 2.5 percent for now,” Bollard said in a statement.

“However, if global developments have only a mild impact on the New Zealand economy, it is likely that gradually increasing pressure on domestic resources will require future OCR increases,” he said.

Domestic economic activity had continued to expand at only a modest pace despite relatively strong commodity prices, Bollard said.

“More recently, domestic business confidence has fallen back somewhat. Further ahead, earthquake repairs and reconstruction in Canterbury are still expected to provide significant impetus for demand,” he said.

“As foreshadowed at the time of the September Monetary Policy Statement, there is a real risk that the European sovereign debt crisis could cause a further slowing in global activity, putting downward pressure on New Zealand’s commodity export prices.”

Bollard said the difficult international market conditions could also result in increased New Zealand bank funding costs over the coming year.

“Annual headline CPI inflation continues to be above the Bank’s 1 to 3 percent target band. That largely reflects the one-off effect of last year’s increase in the rate of GST. September quarter inflation data suggest that, once GST and other one-off influences have passed, underlying inflation is settling near 2 percent.”

Economist reaction

ANZ Economist Cameron Bagrie said it was clear that a 2.5 percent OCR was now seen as an appropriate setting, rather than an “emergency” one."

The next move in the OCR is still up, but only “if global developments have only a mild impact on the New Zealand economy”. 

We maintain our view of a mid-2012 OCR increase but the risk profile is clearly towards later as opposed to sooner in our minds.  This is based on our view that:  (a) we are starting to see more than a “mild” impact on New Zealand from the global scene (based on anecdotes as opposed to hard data); and (b) the consensus is too upbeat on how quickly the European situation could settle despite the best efforts of policymakers. 

ASB Economist Christina Leung said the OCR statement was similar to the September Monetary Policy Statement with global developments dominating.

We continue to expect the RBNZ will remain on hold until March next year, given little in the way of concrete signs that the European leaders are making significant progress in coming up with a comprehensive resolution to the debt crisis. Beyond the 25 basis point OCR increase in March, we expect a steady series of 25 basis point OCR increases at the subsequent meetings until the OCR reaches a peak of 4%.

Recent developments skew the risk to a later start, and the potential for pauses at some point in the tightening cycle.

JP Morgan Economist Ben Jarman said he had shifted his expectation for the first rate hike out to the March quarter from December.

With Dr Bollard stating that the upside global scenario will produce only “gradually increasing pressure on domestic resources”, and with no mention of the prior 50bps of easing being a now-unnecessary insurance measure, we now are looking at a delayed, and more conventional hiking cycle.

In contrast to our previous call for a 50bp hike in December, followed by a slower pace of hikes through next year, we now expect the RBNZ to start the cycle with a 25bp hike in March, accompanying the MPS, and to continue in increments of 25bps, finishing 2012 with policy rate at 3.5%.

BNZ Economist Stephen Toplis said the Reserve Bank had played with a "straight bat" and he kept his view that the OCR was unlikely to be hiked until mid 2012.

We recently pushed back our expectation of when the Reserve Bank would swing in to action until June 2012 (from March). Today’s statement is not inconsistent with this view. Nonetheless, it is worth noting that the statement is very similar to that issued by the Bank at its September MPS and at that time the Bank was looking at a first hike by March.

Following the OCR release swap yields rose modestly and the NZD jumped around 60 basis points. At face value, at least, this would suggest the statement was more hawkish than anticipated though, in the case of interest rate markets, offshore drivers may in fact have been the dominant factor.

On balance, the Reserve Bank is very much on the same page as we are. We are very nervous about the plight of the world but cling to the hope that New Zealand can fumble its way through the mire. While we hold to the  view that growth will improve it is only consistent to also believe that interest rates will forge higher. Of course, if the growth pick up forecast does not eventuate then we, and the Reserve Bank, will, no doubt, change our interest rate stance as well.

HSBC Economist Paul Bloxham said he still expected the Reserve Bank to unwind the March 10 emergency rate cut soon.

The risk is that the RBNZ sits still for longer than we previously expected, as global financial issues remain unresolved. We still expect the RBNZ unwind the emergency setting for policy rates soon.

However, while our central view has been for a move by year-end, the risk is that they sit still for longer.

Westpac Economist Dominick Stephens said he still expected the first hike to be 25 bps in June next year.

The NZ dollar immediately jumped 60pts and swap rates rose four basis points across the curve, a reaction in line with our impression that the statement was on the hawkish side of the range of possibilities. Interest rate markets are not fully pricing in an OCR hike until September next year, compared to the RBNZ’s projections for around March. We expect these two views to eventually meet in the middle.

(Updated with interactive chart below of official cash rates and links, video, ANZ comment, ASB comment, JP Morgan, HSBC, Westpac and BNZ comment)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Comment Filter

Highlight new comments in the last hr(s).

The only bit the market heard was "future rate hikes". Bollard still clueless about monetary matters, still believing that interest rates can relieive "pressure on domestic resources".

I'm praying for an election outcome which will involve a complete review of the monetary framework. 


Is Key, English, Goff, Cullen, or anyone else looking to buy a vote reading this?  The reserve bank, is blaming low interest rates on the EU/US crisis.  Yet listening to politicians you'd expect interest rates to be going up last month.  

What party would be prepared to change the RB Act to put much more emphasis on lowering the exchange rate to a realistic and workable rate?

Neithr of the major parties seems to have a clue on that one and the minors are too preoccupied with their narrow agendas to care.

The Greens are commited to a review of monetary policy framework. 

Are we as a sovereign nation really in charge of our fiscal policy, or the RBNZ. Let's see who knows who owns the RBNZ  - Fire away learned folk!


PS - Why do people continue to let politicans/economists and other assorted liers off the hook by saying "They don't have a clue" - This is utter nonsense, they have access to all the clues going, so hold them to account, don't let them off the hook!

The issue for me is not that the RBNZ is not acting transparently and democratically, its just that the system functions in a way which means it's not up to them, they are not in control of monetary policy to a very large extent. 

The Bank of England is entirely public owned in behaviour, regardless of the Queen owning a small subsidiary.

Even the Fed in the US I think works in a reasonably functional manner, though it is less democratically accountable. But in no way are they in control of monetary policy.

Proof, http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

The ownership of the RBNZ is not that relivant, but I assume it is 'owned' by the public.


 From these recent actions, I get the impression that neither Treasury or RB are prepared to tread on the toes of national in particular and the politicians in general.

FYI from a reader via email:


Can you explain in plain English why the celebration of low interest rates continues when lower interest rates encourage borrowing and higher debt levels and are heavily penalizing savers. http://www.rbnz.govt.nz/challenge/resources/2970552.html

Having read this today, there is not one mention of the effects on savers. I am a saver and have been for my entire life. Using your own calculators on Bank Deposits over 12 months, the difference between say $1,000,000 at 4.2% over 12 months @ 17.5 RWT payable at maturity as opposed to the same equation at 7.8% @ 21% RWT is a loss of $26,970 ($61620 - 34,650. I used the 7.8% as I used to get that. I have yet to buy a house (sold due to health issues)and the prospect of buying another property and taking that money out of my investment income is daunting.

I am of the generation that had no family benefit, 22% interest rates in the early 80's, no cheap imported clothes for my children, children that paid for their University Degrees and interest etc. How on earth is there not more noise out there from those like me who are not pensioners, too wealthy (yeah right!) to get a benefit. I would love a job but late 50's and employment is not there, as evidenced by many people I have grown up with.

The messages are so contradictory! Here's low interest rates so go and buy an overpriced house (Auckland) so you both have to work but don't worry, we will pay your tax for you through Working for Families and Childcare and give your children interest free loans to do whatever at University but screw the older generation who had nothing from the Government, paid off their mortgages and saved what they could. They don't count?


And my response:

Very good points. You're right.
The government (including the RBNZ) is suppressing interest rates and allowing relatively higher inflation to ensure borrowers are not broken.

They're sacrificing savers and rewarding borrowers and property owners.

There are more borrowers than savers and property owners back both parties.


But Bernard, over on the "Alan Bollard" discussion you said there was plenty of room to cut interest rates further if needed, isn't that contradictory to what you're saying here?

Why can't you simply state clearly whether you think the Bank should raise or reduce the OCR, and why?

Updated now with comments from ASB economist Christina Leung and ANZ Economist Cameron Bagrie.

Updated with comments from BNZ Economist Stephen Toplis and JP Morgan economist Ben Jarman.



Totally off topic - I haven't seen this on any news sites yet, but new CVs are available on Auckland Council's web site if anyone wants to know how much there house is 'worth'

I wonder what price NZ debt will sell for, now that CDS protection has been shown to be 'worthless.' If a Greek 'deafult' of 50% doesn't allow a lender to get recompense under a CDS, then why buy it/ why take  the soverign risk/ and if they do - will they want more interest rate price to cover the missing CDS risk?

"In short, the European debt problems are massive, the solutions slow and painful, and the impacts significant and far-reaching. The financial markets are most likely to remain highly volatile and subject to sudden and dramatic risk reversals."

And that means higher rates to attract deposits....Could be fun when the local banks have to start refinancing their debts in Europe.

Wolly - that won't be for a fair while as the NZ banks are now well funded -  - more than 6 months, closer to a year I hear - and their lending certainly isnt growing to put pressure on it.  And CDS spreads have been narrowing in the past 2-3 weeks and probably will further with the bail out announced in europe today - at least for a while until the next crisis, and whilst that could always be tomorrow, it could equally be 2--3 years away now.

This being the case, why did my National Bank floating mortgage go up to 5.85% on November 1st????????????

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