RBNZ holds OCR at 2.5% as expected; lowers forecast track for interest rates by 30 bps; OCR peak seen around 3.75%

RBNZ holds OCR at 2.5% as expected; lowers forecast track for interest rates by 30 bps; OCR peak seen around 3.75%

By Bernard Hickey

The Reserve Bank of New Zealand (RBNZ) has held its Official Cash Rate (OCR) at 2.5%, as expected.

Releasing its December Quarter Monetary Policy Statement, the Reserve Bank said the global economic outlook had deteriorated because of the European financial crisis, which meant economic growth and inflationary pressures remained subdued in New Zealand.

But the bank again reduced its forecast track for the 90 day bill rate by around 30 basis points over the next two years, suggesting it now sees the OCR peaking at around 3.75%, rather than the 4% peak it forecast in its September Monetary Policy statement.

Reserve Bank Governor Alan Bollard said global conditions had deteriorated, as foreshadowed in the Bank’s September outlook.

“Continuing difficulties related to sovereign and bank debt in a growing number of European economies have resulted in high levels of volatility in financial markets,” Bollard said, adding there had also been a softening of activity in the key Asia Pacific region,.

 “Global developments are having some negative impact on New Zealand, though to date it has been limited.  Business confidence has declined and investment spending is likely to remain weak for some time,” he said.

“In addition, tightness in international markets means funding costs for New Zealand banks will increase to some degree over the coming year.”

The Reserve Bank said this may put some upward pressure on retail interest rates relative to the OCR. See my comment piece on bank profits here.

“Monetary policy will need to take account of such pressures,” the bank said in its statement, adding that banks were likely to have to fund any growth in lending in the coming year or two from local term deposits. See Alex Tarrant's article on banks hunting for term deposits.

Bollard said there had been a material increase in the risks around the outlook and the Reserve Bank took the unusual step of sketching out an alternative scenario for an even weaker outlook with lower growth and inflation pressures.

In this alternative scenario it saw 90 day bill rates (and therefore potentially the OCR) flat until the end of 2012.

The bank said financial markets were currently pricing in a flat 90 day bill rate for an extended period, which was consistent with this alternative scenario.

The New Zealand dollar firmed slightly by mid-morning, but was broadly unchanged given the RBNZ's comments on an alternative scenario being in line with market expectations.

Bollard summarized the outlook thus:

“Given the current unusual degree of uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent for now to keep the OCR on hold at 2.5 percent.”

Economist reactions

BNZ's Head of Research Stephen Toplis said the Reserve Bank still appeared inclined to tightening, albeit at a later date. BNZ has shifted its expected first hike in the OCR out to September 2012.

The latest MPS projects the NZ economy won’t run into any capacity (core-inflation) problems until well into 2013. We believe it will be sooner than this, barring a major international downturn.

This is why we have the OCR peaking at a higher level than does the Reserve Bank. We are looking for 4.25% (previously 4.50%) by September 2013. Today’s MPS implies 3.75%. Not a great big difference, but meaningful  enough to get across our story, and especially so in an environment where the markets have been disinclined to price in any hikes, while being keen to price near-term cuts. The main change we’ve made is simply to delay the start of the rate hike cycle we see, to September 2012. This is no later than the MPS infers

For the meantime, however, the international backdrop will no doubt get all the attention. That’s understandable. But we’d also state, don’t lose sight of the path of the NZ economy through all of this. It may yet surprise with its robustness, and inflation.

ANZ Chief Economist Cameron Bagrie said the statement's tone was more downbeat and he was still pencilling in the RBNZ remaining on hold until December next year

Compared to the September MPS (and the October OCR Review), the tone was more downbeat, with a more negative outlook for the global economy and higher assumed bank funding costs. This was not surprising given that the global economic outlook had deteriorated since the RBNZ’s last set of forecasts, and European sovereign debt concerns are still unresolved. In explaining its decision to leave the OCR on hold at 2.5 percent, the RBNZ cited “the current unusual degree of uncertainty around global conditions and the moderate pace of domestic demand.” This is very similar in spirit to their October Review.

However, the RBNZ made no reference to the OCR moving up this time, a clear change from prior communication. This means that the RBNZ has now shifted into neutral gear. However, this does not mean that the Bank is signalling any intention to ease. Far from it. True, the RBNZ’s 90-day projection has been revised down considerably, with a later and less steep increase, peaking at 4.0 percent compared to 4.3 percent in the September MPS.

But it still shows the 90-day interest rate moving up, eventually. Technically, the RBNZ's 90-day interest rate projections look to have the OCR moving up from around the middle of 2012. However, this looks nothing more than the passive workings of their economic model, and is based on a pretty benign central view of global developments. Sifting the tea leaves, the spirit of the RBNZ's view is simple: the odds are that the next movement is up, but not for a very long time.  

Westpac Chief Economist Dominick Stephens said the RBNZ had softened its stance to "hikes from mid-2012"

It is now signalling a gentle series of OCR hikes beginning in June 2011 and culminating in a peak 90-day rate of 4.0%. That compares to last September when the RBNZ signalled a steep series of hikes beginning in early-2011 and peaking at a 90-day rate of 4.3%.

The details were slightly more hawkish than we expected. As expected, the RBNZ continues to believe that the domestic economy will require higher interest rates because "over time, repairs and reconstruction in Canterbury will ...  provide a significant boost to demand for an extended period". Also as expected, the start date for hikes has been pushed out "for now" due to "unusual uncertainty around global conditions."

But the RBNZ stared down market pricing for possible OCR cuts in no uncertain terms. The MPS featured an alternate scenario in which the world economy contracts in similar fashion to the 2008/09 global recession. The alternative 90-day rate forecast was flat. In other words, the RBNZ is saying that even if in a much worse world situation, they'd aim for unchanged interest rates rather than cutting the OCR.

The exchange rate and interest rates dropped at first, which we felt was a counter-intuitive given that the RBNZ had responded to the market's question about cuts with an unambiguous "no." Pricing later rebounded, leaving rates and the exchange rate broadly unchanged. Market pricing for possible OCR cuts reflects a tail-risk of a dire outcome in Europe. So until the European situation is resolved one way or another, the gap between market pricing and RBNZ projections is likely to remain.

Our own view is that the next move will be a 25bp hike in September. We are just a bit more pessimistic about the prospects for Asian and European economic growth than the central bank, but the difference of opinion is minor.

Where our view does differ is that we think the peak in the tightening cycle will need to be much higher than 4%. We’ve alluded to this view many times before. To recap our argument, we don’t believe that higher bank funding costs can forever be offset with a lower OCR. The ‘new normal’ in global credit markets means that the world is less willing to lend to New Zealand at any given interest rate. With less funding coming from overseas, more of the gap would need to be made up from local sources – and that would require higher domestic interest rates to balance savings and loans. To say that this can be completely offset through a lower OCR is effectively saying that we can dictate to international lenders what return they will receive. There are many parts of Europe that are currently demonstrating otherwise.

ASB Chief Economist Nick Tuffley said the Reserve Bank had revised its forecasts for global growth below consensus expectations.

The RBNZ is now explicitly assuming an increase in bank funding costs over the coming year as a result of the financial difficulties in Europe.  However, the assumption of an added 30 basis point increase in funding costs highlights that the RBNZ continues to expect the impact of the Eurozone Sovereign debt crisis on NZ will be relatively mild.

There were few surprises in the Statement.  The key message is the RBNZ will remain on hold for a considerable time, until offshore risks (both financial and economic) have receded substantially.  We recently changed our expectation of when the RBNZ is likely to first raise the OCR to December 2012, and still view that as the most likely timing in the wake of the MPS – though in the current risk environment a broad span of timing is possible.

The RBNZ has a more substantial EU downturn factored in than the latest Consensus forecasts imply, so is in effect already accounting for further near-term downgrades to the lagging Consensus view.

The RBNZ’s new 90-day interest track now implies a first move in 2012 Q3, relative to 2012 Q1 in the September MPS.  The forecast 90-day peak of 4% remains consistent with a low OCR peak, and we are comfortable with our view that the OCR will eventually peak at 4% late in 2013. 

Rate cuts still appear very unlikely, and in our view would only be a prospect under extreme circumstances.  The RBNZ’s alternative scenario, using recent market interest rate pricing as a starting point, implies that even a fairly substantial deterioration of the global outlook would be more likely to mean rates being on hold for a much longer period. There was no material market reaction.

HSBC Chief Economist for Australia and New Zealand Paul Bloxham said the tone of the RBNZ statement was more dovish than the previous one and HSBC had pushed back its forecast for the first rate hike to the third quarter of 2012.

Rates in New Zealand are already at historically low levels, so despite global risks, cuts were not a consideration today. Indeed, we see it as unlikely that the RBNZ would consider cutting rates further, and we still expect that the next move is up. But with global risks prominent and the impact of European developments impacting growth in Asia, we believe that the Reserve Bank of New Zealand will be on hold for longer than previously expected.

Like a boxer trying to pick themselves up off the canvas, the RBNZ has been struggling to lift rates from what they were referring to as ‘emergency levels’ put in place after the Canterbury earthquake in February. The RBNZ now has dropped the phrasing of ‘emergency levels’, implying that these low rates may be held for some time yet. Indeed, it may be the case that we have seamlessly moved from one emergency to the next. Where we are may be the ‘new normal’, at least for a while.

Concerns about the outlook stem from both weaker growth forecasts for New Zealand’s trading partners and the impact that the increased cost of offshore bank funding will have on local retail interest rates. RBNZ estimates suggest that the cost of funding has already risen by about 40bps in the past few months. They also clearly note that ‘monetary policy will need to take account of these pressures’.

For policy, the RBNZ is still forecasting an upward slope in 90-day bank bill rates, rising to 3.6% by end-2012, implying that they still expect the next move is up. A country with a large net foreign funding requirement, such as New Zealand, would be hard-pressed to lower interest rates too much further, as it may start to have deleterious effects on its ability to fund itself. We believe this will be a key factor that keeps the RBNZ from considering further cuts.

(Updated with details, economists reactions from Westpac's Dominick Stephens, ASB's Nick Tuffley, BNZ's Stephen Toplis and HSBC's Paul Bloxham updated video)

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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Lowers forecast on ocr but raises expectations that banks will soon cop rising costs on their loans...Bollard cannot prevent mortgage rates rising...be warned.

Best not to have a mortgage soon unless debt relief is granted.

Those forecasts, eh? Dismal. I mean the previous woefully inaccurate forecasts that still have us at 2.5%.

Should have cut and introduced the use of ratios:




Somewhere between pride and blind dogmatic faith in a failed idelogy pragmatism has been lost.


Unfortunately, small minded people who want rises in the OCR so that Interest Rates rise to help their savings and 'drive down the cost of housing' always forget one thing.  Very few businesses now run without an overdraft.  Although Overdraft Interest Rates are higher than home loan ones, they are still calculated on what the bank can borrow money at.  If the base rate goes up, Home Loans go up, TD rates go up, but so do Overdrafts.  You might get more in your savings account, but then again you might end up losing your job as businesses cut back to pay the addiditonal interest costs.

No, I was pretty much assured by your whining that you would be retired and living off your savings...that isnt SAVING, savings is where you have an income and put money AWAY for later.

Which is where the whining about low returns comes from mostly....the old ones.....who DIS-SAVE. Typically they are the same fools who put all their money in the finance companies and got trashed and are now to frightened to do anything.....and expect everyone else to pay for it....life isnt a bed of roses mate even in old age.....its ugly all the way through.




Unfortunately, there is more than just you live in NZ.  If people lose their jobs, because of high interest rates, then the tax take that the Treasury use to pay your Super goes down, then there have to be more cuts aswell to healthcare, infrastructure etc.



No, just raise taxes! hehehe smarty


In the 1980s what was the capital to wages ratio? 3 to 1? now its 6 to 1.  Oh and in the 1980s ppl got free education? now a typical grad has $15k of loan to pay off....

Try comparing apples with apples.....I know no one from the 1980s who achieved that unless they are earning a lot or bought a awful house in an awful location. 

Losing jobs and high un-employment is how its going to be....the BBs built up huge debt younger ppl will be paying off....and pillaged the planet leaving a lot less for future generations....congrats on being so amoral.



You tell him Ivan! ! Steven you ungrateful Gen X/Y. Old Winnie will be in there fighting for the oldies this term.

Bernard cue: time for an intergenerational blog now that everyone know where Auckland house prices are heading and we can't blog about that any more :)

Deleted by Alex

Don't knock it , Ivan , some ultra-lefties can pee pure uric acid .... it might clean the lichen off your headstone .....

Two points of order , Mr Ivan : Based upon the NZ judicial system there are no innocent victims . If you're a victim , then you're guilty of " being there " , being in the wrong place at the wrong time ,  therefore you not an innocent . It is partially your fault .

..... secondly , defense is no defense . You're not professionally trained and equipped to defend yourself from attack . You're expected to lie there passively and " take it " until the appropriate authorities have arrived and fully assessed the situation .

.... hope this has helped  : the Gummster


Steven, Ivan

Debating whether interest rates should go up and down, and who it would affect is great, and that's what we like to see on this blog.

Just please don't let it degenerate into personal abuse etc. If you want to do that then go to Kiwiblog et al. It's not welcome here.


Any idea where Kunst & Powerdownkiwi have got to , Alex ..... Bernard hasn't ran amok banning people again , has he ?

Personal abuse is not allowed - good. How about banning also (1) groundless gloomy predictions and (2) the peddling of unhelpful intergenerational enmity?

... be fair to Bernard , his groundless gloomy predictions are no worse than Ken Ring's ..

But I'm not sure about his peddling of unhelpful  intergenerational enemas ...

It's really rather simple mate, Printing is NZs answer to sustainable profitability... US notes, Euro notes, GBP notes, Zim Dollar notes .... Then charge high interest for the loan of said magical appearing currency... say about 15%, if you conjur about a trillions worth we'll be living the life of Riley! Imagine what our property prices will be like then...

Gold and silver are low risk investments.  Perfectly preserving your purchasing power, for generations.  Why make the banks fatter?

Do you understand the relationship between interest rates and inflation?  If you measure real inflation with petrol, land, gold, wood, milk etc, you'll never keep up when you have your money in the bank.  Better to buy those things with money, and preserve your wealth.

They are not low risk.....you can lose your shirt...


Please explain.  They always have value regardless of mentary phenomnenon, how is that losing your shirt.

Because the price of gold (precious metals) can vary in relation to goods you need....So if you had bought gold in say 1980 at $700.....it then hit a low point in 2000 of about $400....not even allowing for 32 years of inflation.....to today.

So $700US in 1980 should be at 4% inflation (say) per year $2360US (roughly) in 2012....todays price is $1739 ish and the only reason its this price is because ppl are thinking its a) the next best thing siince tulips b) a hedge against hyper-inflation that isnt going to happen....so its a bubble....IMHO

These charts may make for sobering thought....



Now if you buy at the right time as a hedge to see your wealth through an event, then yes........is gold a sure bet for protection? not always....IMHO.

Hence why I dont play here.....



Nah none of that skudiv...any bloke with some 'get up an go' would do better to cross the ditch with the better half in tow and get themselves a real good 4wd truck or two with all the clobber and go bush to find some Yellow stuff in the raw...not them...the metal....He'll need the better half to mind the billy and keep the fire going.

Pleanty of gold to be found here by all accounts Wolly, it's too much like hard work for most people though.  Much easier to get a housing subsidy, or can't be stuffed allowance, or too fat to work benefit.  These are the government approved ways of achieving financial freedom.  Not that there is anything productive to do, by all accounts.

Two friends go to south island most years and prospect, try and find gold.....they are not even covering the cost of the trip....they have some good kit....

How about you do the "hard work" and find out for yourself how easy it isnt.


Tell them to speak to the EQC in chch..lotsa gold to be had for just looking at stuff.....Tell em to cross the ditch if they are keen steven...anything here is locked up and beyond the publics reach...it aint easy far as I can see but it can be done...and it's gotta be better fun than sitting here on your bum.



One is flying out on the 31st.....his wages will jump 25%...in OZ dollars.....he will be on $120kAU to start......here we are advertising for his replacement for $85kNZ.....fat chance.


Well put your money to work harder....which means at risk....its how things work, want a low risk, accept a low return.


You mean you guys are going to swallow this crap of increased pressure on banks in a scenario of record profits for those poor creatures bedevilled by overseas markets? While at the same time we continue to allow banks to CREATE money and Mr Bollard continues to give them more time to get close to a core funding ratio that is WOEFULLY inadequate when markets freeze?

Aren't we the same people that felt only experts understood economics in 2007 and then insisted in 2008 that even a primate could have seen what was coming?

The nation's testicles are shrinking by the minute.

In 2008 we woke to find that someone had hogtied us and put a noose around them (testicles) and has a 2nd Great Depression risk dangling from them.........at some point that will drop......that is certian in my mind......we are long past being able to do anything about it....we have been cluster f*******, royally and soon it will dawn on the sheep......Labour could have prevented the worst impacts of this by stopping crazy borrowing, they did not, mind you National would have been no better, with Brash in charge, probably worse IMHO.


Occupy everything, get some Guy Fawkes masks and deliver some frontier justice to the bankers, politicians and anyone else you don't like or has something you want.  That way we can live in a truely free society, where only the strong and willing survive, and the weak or lazy are wiped from the face of the planet. 

@ Frazcam - You might get more in your savings account, but then again you might end up losing your job as businesses cut back to pay the addiditonal interest costs. 

Bank depositors 12 mth Interest rates are below the most recent recorded annual inflation (4.6%) rate, so they are hardly on to a business destruction windfall, especially after tax.

It is our banks and public policies which determine economic outcomes and hence capital allocation.

These two NZ Herald headlines say it all:

Maunfacturing takes another hit  

$1b of house mortgage approvals

The first attracts a bank risk weighted capital retention value of 100%, the second 50%.


Sorry Stephen,


I am bit simple - could you explain what you just said in blond terms please?


I was saying that if rates rise for investors (TDs etc) then rates rise for borrowers, which include NZ businesses.

Where is the "uncertainty?"  The world is sitting on a staggering amount of unpayable debt.  Growth is gone, there is no possible way to minimise the real value of this debt.  Instead of banks going broke, countries and monetary unions are going to default.  Uncertainty is too optimistic by far.  The major global currencies are going to have systemic collapse, and the way we deal with money will have to be rewritten.  Policy can kick the can down the road, but the end of the road is very near.  Doomster I may be, but the writting is on the wall.


This is a complicated area. Banks generally determine their gross performance in terms of return on capital.

But the prudential rules of operation determined by the RBNZ, at the local level, impose capital adequacy rules for each type of bank loan. A quick glance @ page 22 of this document gives the levels of risk weighted retention required for first mortgage residential properties. Further reading will provide definitions for other asset types. 

Bottom line banks charge a lot more for business loans because their return on capital excluding all other factors is lower than residential mortgage loans.

Yes, if TD rates rise banks would raise these rates - but regulations could be adjusted to give all participants a fair suck at the teat.

RBNZ remains reluctant to act – 8 December

The Reserve Bank’s reluctance to act upon serious economic problems demonstrates the need for Reserve Bank Act changes say the New Zealand Manufacturers and Exporters Association (NZMEA).  The Reserve Bank left the Official Cash Rate at 2.5 percent this morning.

NZMEA Chief Executive John Walley says, “The RBNZ has offered a dismal forecast with a worse alternative scenario which looks all too probable at this point, yet apparently there is no need for action.”

“The RBNZ has reported drops in its business investment forecast; the central banks of the USA, Europe, the UK, Canada, Japan and Switzerland have clearly stepped up but not the RBNZ.”

“We still lack the macroeconomic conditions to support export growth.  The Reserve Bank’s comment that, ‘the depreciation of the New Zealand dollar provides some support for the tradable sector of the economy’ is really strange.  A TWI under 60, not almost 70, would be needed to support the tradable sector.”

“A wider set of targets for the Reserve Bank to include export growth, and a focus on domestic rather than headline inflation, would help to galvanise the culture of inaction at the RBNZ.” 

“Contractions in manufacturing volumes suggest that change is urgent.  The Reserve Bank of Australia cut yesterday; we wonder just how bad the world has to get before we see the same sense of urgency from the RBNZ.” 


Why do we have to be such followers, especially behind Auz?





And the main reason for it all, is so that can herald in a one world Government to solve all the worlds problems! NOT.!!

Feb 2012  RB OCR decision    2.0

Apr   OCR    1.5 

May 2012   1.5

Aug 2012   1.0    Global Depression

Oct 2012 OCR  0.5  Flatlining

2013   OCR 0.5   Flatlining

2014 OCR  0.5     Flatlining

Lift,   lift   , lift     pilot says lift



LOL....except I think the global depression will start after the global financial system freezes and then implodes....I dont think Aug2012 is realistic........France and Italy have huge debt in Jan and Feb 2012 I really wonder if its will go past those events...unless the ECB is prepared to choke of 50billion each.......

So shove that one to the front, then yes I think you will be correct on the sequence....2012 will be the start of the downward spiral.  By end 2012 I think we will be -ve ie deflation.....then we can listen to the screams of the passengers who are buckled in......in conjunction with ours.



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