OCR on hold at 2.50%; New Reserve Bank Governor Wheeler notes high NZ$ undermining export earnings; Expects inflation to head back to middle of target band; Says housing market activity rising as expected

Graeme Wheeler

By Alex Tarrant

New Reserve Bank Governor Graeme Wheeler has left the Official Cash Rate (OCR) on hold at 2.50%.

In his first OCR review since taking over the job from former Governor Alan Bollard in September, Wheeler noted the high New Zealand dollar was undermining export earnings and encouraging consumption of imported goods and services.

Wheeler said the global economy remained fragile, with further recovery “heavily dependent on policy implementation.”

“That said, market sentiment has improved from earlier in the year, suggesting the risks to the global outlook are more balanced,” Wheeler said.

Domestically, New Zealand’s GDP continued to expand at a modest pace.

“Housing market activity is increasing as expected, and repairs and reconstruction in Canterbury are boosting the construction sector,” Wheeler said.

“Offsetting this, fiscal consolidation is constraining demand growth, and the high New Zealand dollar is undermining export earnings and encouraging substitution toward imported goods and services,” he said.

“While annual CPI inflation has fallen to 0.8 percent, the Bank continues to expect inflation to head back towards the middle of the target range.

“We will continue to monitor inflation indicators, such as pricing intention and inflation expectation data, closely over coming months,” Wheeler said.

“For now it remains appropriate for the OCR to be held at 2.5 percent,” he said.

What about that low inflation?

The decision to leave the OCR on hold follows figures showing annual fell to 0.8% in the year to September, below the Reserve Bank’s 1-3% medium-term target band. That reading prompted markets to indicate they expected a rate cut by the Reserve Bank sometime in the next year.

Local economists expect the Reserve Bank to keep the OCR on hold until July next year at the earliest, although acknowledge the case for a rate cut is growing. Increasing numbers of them are leaning towards a ‘lower for longer’ stance of no rate hikes until early 2014.

The Bank’s latest public forecasts, released in September, show the Reserve Bank is itself expecting to raise the Official Cash Rate at the end of 2013 or early 2014, going on its forecast 90-day bank bill interest rate track.

The OCR is the base for interest rates in New Zealand, and is most closely correlated to floating, or variable, mortgage rates. A move in the OCR is generally followed by a similar move in these rates.

The OCR is the Reserve Bank’s primary tool for the implementation of monetary policy. It is mandated to focus primarily on price stability, with price movements measured by annual Consumer Price Index (CPI) inflation figures released quarterly by Statistics New Zealand.

While annual inflation fell below the current 1-3% target band in the year to September, the Bank is required to try and keep the CPI within that band ‘on average,’ and over the ‘medium-term’. That allows the Bank some wriggle room outside the top and bottom of the band in the short term.

Wheeler said the Bank expected inflation to head back to the middle of that band – he has also been given a more specific inflation target of 2% to aim for – and said the Reserve Bank would monitor pricing intention and inflation expectation data closely over coming months.

The September quarter was the fifth consecutive quarter in which inflation was lower than the Reserve Bank had expected, and local economists are wondering whether the Bank might revise down its inflation forecasts in its December Monetary Policy Statement.

That would likely boost expectations for a rate cut, or at least push more into the ‘lower for longer’ 2014 camp.

Read the Reserve Bank statement below:

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5 percent.

Reserve Bank Governor Graeme Wheeler said: “the global economy remains fragile, with further recovery heavily dependent on policy implementation. That said, market sentiment has improved from earlier in the year, suggesting the risks to the global outlook are more balanced.

“Domestically, GDP continues to expand at a modest pace. Housing market activity is increasing as expected, and repairs and reconstruction in Canterbury are boosting the construction sector. Offsetting this, fiscal consolidation is constraining demand growth, and the high New Zealand dollar is undermining export earnings and encouraging substitution toward imported goods and services.

“While annual CPI inflation has fallen to 0.8 percent, the Bank continues to expect inflation to head back towards the middle of the target range. We will continue to monitor inflation indicators, such as pricing intention and inflation expectation data, closely over coming months.

For now it remains appropriate for the OCR to be held at 2.5 percent.”

ANZ Economists' reaction

The RBNZ left the OCR unchanged at 2.5 percent today, as expected.  The policy statement maintained the continuity of recent statements, providing a smooth transition to Governor Wheeler.

The statement was reasonably neutral, with a balanced risk assessment for the global outlook and a moderate outlook for domestic demand. The statement provided little indication of the direction or timetable for OCR moves.

The market was looking for dovish nuances and if anything the assessment surprised the other way. We consider the paring back in market pricing for rate cuts and the modest NZD lift to be a positioning squeeze: the market was simply looking too much for signals and trying to play the man as opposed to the ball. 

Our central scenario for interest rates is up as opposed to down: cutting the OCR in the midst of a city rebuild is a tall ask, with a case for unwinding some policy support once the rebuild gets some critical mass.  A rate cut cannot be ruled out, but there remains a high hurdle to this.

We continue to expect an extended period on the sidelines, with the OCR on hold until 2014, with domestic rebuild momentum balanced by what we consider will remain a turbulent international environment with Europe the epicentre, and dichotomised performance out of the local labour market.

ASB Economist Nick Tuffley's reaction:

We interpreted the inflation parts of the statement as the RBNZ being slightly more wary about the risks of inflation remaining lower than the RBNZ has anticipated, hence slightly more prepared to respond/wait.  Accordingly, we have slightly increased our probability of an OCR cut over the next 12 months from 20% to 30%.  But, like most people, the RBNZ is more comfortable that the risks of a major Eurozone financial calamity have receded.

Last week we changed our OCR view and retain that view after this statement.  That view is: we expect the RBNZ with lift the OCR 25 basis points at each of the September and December 2013 Monetary Policy Statements (MPS).  We then expect the RBNZ to pause for 6 months to assess the impact of recent rate hikes on households and businesses.  We then expect a further two 25-basis point rate hikes at the June and September 2014 OCR announcements, followed by another 6-month pause, and the final two 25-basis point increases at the March and June 2015 OCR announcements.  We continue to expect a terminal cash rate of 4%, which will return retail lending rates to just below historical-average levels.

Market reaction

Despite what appeared to be a slightly more dovish statement in our view, the NZD lifted on the back of the statement, and short-term interest rates have lifted (as the market has removed some of the rate cuts priced in) seeing the yield curve flatten.  The tone of the statement may have been seen as more upbeat by those who were expecting rate cuts in the near term, particularly as the RBNZ was slightly more encouraged on the global outlook, noting the risks to the global outlook are more balanced.

BNZ Economist Stephen Toplis' reaction

It came as a surprise to no-one that the Reserve Bank of New Zealand left its cash rate unchanged at 2.5% today.

However, it may have surprised some that the general tenor of the OCR review remained consistent with the RBNZ being on a tightening bias. In fact, one might even conclude that it was slightly more hawkish than the September Monetary Policy Statement.

Looking forward, the RBNZ will continue to monitor everything that moves with slightly more attention paid to international developments, the NZD, construction and housing market activity. And, in case you’d forgotten, there was also a reminder from the Bank that it is inflation that matters most so “pricing intention and inflation expectation data” will also be looked at very closely in the near term.

Those looking for insight as to how new Governor Graeme Wheeler might behave will be disappointed. It was always our opinion that it would have been madness, for a man who has been at the helm for such a short period of time, to reveal his spots. He hasn’t. The December 6 MPS might be a different story, though even this might be a tad early.

There was absolutely nothing in today’s statement to change our view of the world. Formally, we have our first rate hike in December 2013. But let’s not get too cute about this. The real message is we see little reason for rates to move in either direction for some time.

First NZ Economist Chris Green's reaction:

On the whole, there is little in the way of new information in the October OCR Review commentary, reinforcing that the RBNZ remains comfortable with current monetary policy settings. Perhaps the most surprising feature is the absence of a slightly more dovish tone from Governor Wheeler. However, this likely reflects a combination of a general reluctance to signal major changes in tone while the new Governor familiarises himself with the role, together with the absence of a comprehensive forecast review undertaken at the time of MPS releases.

We retain our expectation that the RBNZ is likely to wait until the December 2013 quarter – at the earliest - before raising the OCR by 25bps to 2.75%. However, reflecting recent signs of some softening in the surveyed pace of domestic economic activity over the September 2012 quarter, the prospect of a cut to the OCR has increased.  We currently assess around a 30-40% probability of a cut in the OCR over the year ahead.

(Updated with ASB economists' reaction, BNZ economist's reaction, ANZ Economists' reaction, First NZ Economist's reaction)

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For now it remains appropriate for the OCR to be held at 2.5 percent.”
Shock....? yes I'm shocked you could build a twenty minute story around the inevitable delivery of the punchline.....
Although I may Wheedle in a different pitch ...The song remains the same.
Come on Alex ...where's that post I put up a week or two ago..!!!
Suppose I'll go read it now....Wheedler's piece I mean , high dollar noted..ha ha ha ha ha !! ......young Bolly's a chip off the old block.

Well he at least says The Emperor has no clothes. Wheeler is the first to acknowledge that the strong NZ$ is harming export earings .

He appears quite happy to allow the Auckland housing boom continue unabated.

I am wondering how he arrives at the prognosis that inflation will go up?
There is overcapacity everywhere in the developed world , and this is causing deflationary pressures on prices of manufactured goods ( and their currencies ) which will bring prices down ( in theory)  .
This coupled with NZ consumers who wont spend and the strong NZ$ is likely to lead to even lower inflation, not higher inflation
For example  , I expect prices of used imported cars to fall , so I am waiting until 2014 to replace my car.  

Wheeler would have been accused of being impetuous had he done anything at his first bite.
Having got his feet under the table he can now consider a significant step in a few weeks. On the positive side, his recognition of the dangerously high exchange rate and its effects could signal that action is to be expected. What is needed now is a bit of help from Double Dipton English and Jonkey.

Wheedler is a disappointment in more than just the regurgitated Mantra sense...I'm finding it more than a little annoying his features are so hard to caricaturize...a lack of definition to his blank face...
 Hmmmm, what's with the pupils Alex..>? is he on drugs Alex ...? is that it..?...the level of dialation is indicitive of heavy Prozac consumption.....or maybe being schooled by Bolly was enough to generate Trance state.
 We must monitor inflation closely....inflation is our target..do nothing ...wait ..see..target inflation...you will be assimilated..!...bleep..!

FYI updated with ASB's reaction that the statement appeared less worried about inflation and that ASB had increased its probability estimate of a rate cut to 30% from 20%.

Updated now with comment from BNZ's Stephen Toplis that the statement could be viewed as slightly more hawkish than Alan Bollard's last statement.

The word 'Inflation' gets 4 mentions in the statement, 5 if you include what CPI is supposed to represent.
Construction & Housing, as per usual, feature as well.
Poor old exporters, who fund this country, only rate one mention.
Not much doubt about where this guy stands.
Wish he would go stand somewhere else though, like under a coconut tree, during a cyclone.

Good move Mr Wheeler. Correct decision at this time.  If any crisis unfolds overseas we have room to cut rates rather than cut premature.  Holding rates will keep inflation in check. 

i love the intro - "no relief for home owners"
FFS! - interest rates are at record lows already - if people with mortgages need relief at 5% i would suggest theyve cocked up badly themselves somewhere along the line

FYI ANZ economists' reaction added, including its forecast that the OCR is on hold until 2014.

OCR is on hold until 2014.
It's hardly fighting talk when Fed said the same for longer.
In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

When the  Mayans said we'd all die December 2012, I didn't thik it would be from boredom at the hands of Central Bankers.....
Hey that's right ..! were all going to die.!...lets party...c'mon Bernard you start us off in a merry tune oooh say....You picked a fine time to lead me goose wheeler....
I must say I'm quite surprised there has not been more effort by Govts to play up the Mayan angle, I mean in an effort to stimulate December quarter spending.......a real lack of vision once again on their part.

December 21 'st , huh ....... ummmmm , do we buy Christmas presents this year , or not ?
.... I'll be mighty annoyed if I splurged on gifts , and then the planet Nibiru slams into earth 4 days before Xmas .... what a frigging waste of time and munny ...
Might just leave me Gummy munny  invested in nappy manufacturers ...... I have a sneaky feeling we're gonna need alot of them as the apocalypse approaches ...

Believe in it or not GBH ...a great reasaon to cancel Christmas this year, humbug..! I shall say to the wife as she thrusts yet one more empty finger at me to adorn with compressed coal.
 No I shall say pointing skyward ..! your going to die ......!

Die ? ... no one mentioned that , until now .... Gee-zus ! ... this time the apocalyptic end-of-the-world is gonna be serious , yer reckon ? ...... bugga ....

No GBH The End Of The World is not likely to be really serious,[?] 
Probably just another  minor blip along the way - a bit like Y2K, AGW,SARS, and other similar prognostications from those with little else to occupy their tiny minds,.... mind you if that point of view  is correct I can't understand why Smiley - Wavey is not leading the charge on this one ???  

Could it be;
Too many people on the planet = low utilisation yield for each = no hyperinflation = low interest rates for rest of our lives?
IMHO the posters here represent NZ's most reliable brain trust, and since frequenting myself, I am happy to report mine is being stretched to absorb new knowledge, which is power, almost daily, thanks to all.
So, had an epiphany while reading book recently and thought I would present here, to see if anybody can either destroy or further the posit...
Book said effect of Black Death in Europe was less workers, resulting in increased standards of living via higher wages and much lower costs of food and housing.
It seems we have the exact opposite nowadays and got me thinking that if there are too many of us around, compunding this is PDK's planet earth yield limit, then there will always be legions of have-nots. If half the world's population is broke, underemployed, etc. then I fail to see classic inflation getting any purchase. 
Obviously the reverse of the Black Death scenario means demand will lead to price inflation for essentials like housing, food, fuel, etc. Deflation then being automatic for everything else.
All this leaves me thinking there may be no need to bring interest rates back up. Perhaps ever. 
This is obviously a dynamic most of us would be unfamiliar with, other than watching Japan.
Amongst other things, low interest rates seem to create fear while anybody who previously relied on interest income is effectively disabled, more pronounced with an aging population, this being deflationary. The net gain is still zero of you have to disable these people in order for the debt orgy to resume.
And here is the brave musing; What if we have it wrong? What if lowering rates makes no difference or worse? Would that mean raising rates back up is somehow the answer?
And I suppose it cannot be ignored that another Black Death type event is always a possibility.
Prozac, here I come.

More bad news for exporters , has anyone noticed the Kiwi $ is strengthening yet again today  ....... on the back of Wheeler's decision to hold rates .
Is this an inintended or an intended / excpeted consequence?

(Updated with ASB economists' reaction, BNZ economist's reaction, ANZ Economists' reaction, First NZ Economist's reaction)
Please include my reaction: Yawn

Still no action on the exchange rate. 
Wheeler states the obvious:
the high New Zealand dollar is undermining export earnings and encouraging substitution toward imported goods and services.
And that's on top of a disastrous current account deficit, as we all know. But still he makes no hint that doing anything about it is his responsibility; he English and Key are perhaps the three fabled monkeys in relation to it.
I actually totally accept that lowering the OCR would be a very circuitous route to fix the exchange rate, and would have some less than desirable consequences; like another housing bubble, and the wrong incentives for savers. 
But there are plenty of other tools that should be in the remit of the Reserve Bank, working ideally in conjunction with government, that would very quickly address the current account. At least he could be saying that he wishes to invoke some of those; given that he has at least acknowledged the problem. Separately, I believe there is a strong argument to "see through" the effects of the rebuild of Christchurch; otherwise there is totally unnecessary further destruction of export and import substitution businesses while the rebuild is undertaken.

I think you are right, and the key to what you are saying is
"... in the remit of the Reserve Bank"
RBNZ seem to have no other targeted policy options available, only the OCR.
Other Central Banks have recognised that a degree of targeted regulation can have the desired impact on areas of concern, without causing the collateral damage inflicted by a sledgehammer approach of an OCR type movement.

moa man,
Indeed, except as his new agreement with the government was announced there were somewhat cryptic comments that he can use other tools; albeit I don't believe what they were, to solve what problems, and when they might best be used, was made clear. The current circumstances where the RB have actually failed on the underside of inflation targetting in the last quarter; and he's acknowledged the exchange rate problem, beg the question as to why he's doing nothing now, and at least what he would do about the problem if it continues. I take his silence on that as pretending there is nothing within his control, which is very disappointing indeed.

Clearly the banks did not jerk the strings hard enuff....holding at 2.5 and speaking of inflation risks...tisk tisk...not what the masters of the economy wanted him to say...they wanted cheaper drugs to push!
Now...did Wheeler speak of inflation to temper the 'masters' demands or...was he reporting the truth about the trainwreck just down the track.
Great fun to learn that Wheeler believes in recovery....hah.
Watch now as Tweak and Fiddle begin to speak of 014 and the surplus to come..almost...not quite...didn't they do well...sod it...back to buying the voters off with sliced pork for another 3 years.

The Reserve Bank should be cutting the official cash rate by as much as 50 basis points, given inflation is likely to remains extremely low, according to Berl chief economist Ganesh Nana.
So we have a combination of Govt spending cuts & tight monetary policy ...   
Oh well, the quicker the RBNZ ignores the new reality & runs a high interest rate policy (relative to all other developed economies) then the quicker National gets the boot....