RBNZ holds at 3.5%; reduces forecast interest rate peak by 50 bps to 4.7% by 2017; warns NZ$ "unjustified, unsustainable."

RBNZ holds at 3.5%; reduces forecast interest rate peak by 50 bps to 4.7% by 2017; warns NZ$ "unjustified, unsustainable."

By Bernard Hickey

The Reserve Bank of New Zealand has held the Official Cash Rate at 3.5%, as expected, and reduced its forecast peak for interest rates by around 0.5% to around 4.8% by 2017.

Economists saw the statement and the Reserve Bank's forecasts as dovish and some delayed their forecasts for the next rate hike until mid 2015 from early 2015 or December this year.

Westpac Chief Economist Dominick Stephens changed his forecast for the next OCR hike to June 2015 from January 2015 and lowered his expectations for OCR hikes in 2015 to 75 basis points from 100 basis points. JP Morgan and TD Securities changed their OCR hike views to March 2015 from December 2014. ANZ said it may change its rate hike view from March to June if the New Zealand dollar doesn't fall as expected.

"The Reserve Bank has made it obvious that it is now in a different mood. Although the RBNZ's GDP forecast has changed little from previous statements, the RBNZ has changed its judgements around how economic growth will affect inflation," Stephens said.

Citing a slowing housing market and a lower than expected boost to housing and demand from migration, the Reserve Bank said it wanted to take some time to see how its four rate hikes since March, its high LVR speed limit and lower commodity prices would affect inflation.

Governor Graeme Wheeler said CPI inflation remained moderate, reflecting subdued wage increases, well-anchored inflation expectations, weak global inflation, and the high New Zealand dollar.

However, he warned spare capacity is being absorbed, and annual non-tradables inflation was expected to increase. He said risks remained around how strongly net immigration would affect housing demand, and how inflation would be generated by the construction sector.

"In light of these uncertainties, and in order to better assess the moderating effects of the recent policy tightening and export price reductions, it is prudent to undertake a period of monitoring and assessment before considering further policy adjustment," Wheeler said.

"Nevertheless, we expect some further policy tightening will be necessary to keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained," he said.

Currency warning

Wheeler repeated his warning about the high New Zealand dollar, saying it was restraining growth in the traded sector.

"The exchange rate has yet to adjust materially to the lower commodity prices. Its current level remains unjustified and unsustainable," he said.

"We expect a further significant depreciation, which should be reinforced as monetary policy in the US begins to normalise."

The New Zealand dollar dropped under 82 USc after the statement and the repeated warning about the currency being unsustainable.

Wheeler declined comment on whether the Reserve Bank had intervened in currency markets, or whether it would.

He also declined comment on the Government's plan to double first home buyer subsidies.

Reaction

BNZ Head of Research Stephen Toplis said the Reserve Bank appeared a "bit bamboozled" as to why inflation was as low as it was.

"Accordingly, not only has the Bank today offered a less aggressive interest rate track than it has done previously but it has also intimated that the risks to that track are biased to the downside," Toplis said.

Toplis said the bank had been deliberately vague about when the next rate hike might be.

"RBNZ staff members have been quick to point out that the actual view of the Bank is that the cash rate will probably next be raised sometime between December 2014 and September 2015. This is a distinct softening from the June MPS when December was clearly signaled," he said, adding however he was sticking to his view that the next rate hike would be in March.

ANZ Chief Economist Cameron Bagrie said rate hikes would resume next March at the earliest. "Indeed, if the NZD doesn’t continue to move lower, we’ll push it out to June," Bagrie said.

"We’re not believers in a new paradigm for inflation, but we certainly believe some inflation suppressants deserve more attention; productivity growth looks strong and credit growth is below nominal GDP," he said.

ASB Senior Economist Chris Tennent Brown said ASB still expected a March hike, "but the remainder of the tightening cycle could be slightly more elongated than previously forecast."

"The RBNZ is firmly on hold.  There is a lot of thinking going on inside the RBNZ about the relatively mild impacts (compared to the past) of migration and general capacity pressures on inflation," Tennent Brown said.

ASB sees three OCR hikes in 2015, before one more in March 2016 to reach a peak of 4.5% three months later than previously assumed.

JP Morgan's Ben Jarman shifted his expectation of the next rate hike out to March 2015 from December this year and highlighted the Reserve Bank's more relaxed view about migration.

"For a small open economy like New Zealand, this change in view on migration is a big deal," Jarman said.

"First, it allows more of the recent growth upswing to be characterized as a positive potential growth shock. That allows policy some near-term flexibility. Second, and as important, the more front-loaded impulse to the supply side from immigration keeps inflation benign for another year, and bridges the crucial gap between the RBNZ’s rate normalization, and that in the developed markets," he said.

(Updated with currency moves, Westpac change of OCR hike view, BNZ comments, ASB comments, JP Morgan comments)

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20 Comments

Question is , did they intervene in the currency market ,  only to find it had no effect whatsoever ?
And are now too embarrased to admit to it , because it failed ?

Wheeler was asked if they had intervened and declined to comment.

His claim to silence demands a collective challenge from those who pay his living. Unelected apparatchiks favouring foreign counterparties with such information will not do.

Thanks Gareth ... "declined to comment " speaks volumes , and has the chattering classes all abuzz.
I have the sneaky feeling they did intervene and it did not work , so 'no comment' is the exit door

I think the opposite is true.  They were hoping not to intervene and be shown ineffective,   the USD leaped up, giving them some breeathing space, so they're not going to admit either way in case someone calls their bluff.

Picked up some nice pips last few days ... now just to not get caught with hand in cookie jar...

Finally some sense from Cowboy... they have said all along intervening struggles to work. Their ammunition is paltry compared to the global players and general flow in the market. When they did intervene pre GFC they definitely announce it because they want to have the desired effect. What they learnt from the eposide is that the effect is temporary and it took the GFC to put the trades "in the money." Did they intervene, 99% chance they didnt (Reference: I know FX traders/sales people at most banks in NZ and many more in london)

But there has been an effect.  The dollar has been trending down strongly for some weeks.

As the Radio New Zealand financial reporter put it this morning, there has been "sod all" drop in the dollar compared to the drop in Diary Prices.

No Change was 'widely expected', but when that is confirmed today the NZ dollar dropped.  ie.  was not fully priced in.
It seems to me that the sentiment on the New Zealand dollar is downwards.  And that will be so for quite a while yet. 
(Not that I would bet the farm on any such prediction)

You have company in the form of a technical perspective - but the forecast physical flows may overwhelm such predictions while European/Japanese growth prospects wither at an alarming rate.

I think your word sentiment is corerct.
I have thought for a while now that little is ever 'priced in' and it is feelings and sentiment that drive the nzd more than anything else. Economic fundimentals seem less and less useful in predicting which way it will go - IE should have follwed the WMP price down a month ago.

hold-ya-horses
 
The Bureau of Statistics "estimates" that 121,000 jobs were added last month, but only 14,300 of them were full-time, with the remainder part-time positions.
 
Their work force is increasingly being casualised

Full-time employment rose 14,300 in August and part-time employment rose a record 106,700.
http://www.businessspectator.com.au/news/2014/9/11/australian-news/jobs-surge-august-jobless-rate-dives

Maybe the profits from a certain RBNZ shareholding are affected by an OCR rise......gosh so much confusion for you Wheeler.....having to pay the Government a dividend certainly makes you have to work harder to ensure some of those "other investments" perform for you.
 
Now Bernard small question for you......what is your interpretation of "Insider Trading rules in NZ" ?
 
http://en.wikipedia.org/wiki/Insider_trading

noataneconomist you're touching on a subject which interests me but i know little about.
 
Do you know how many shareholders/subsidiaries operate in conjunction with the RBNZ?
Is it just the NZ Govt?  Or is it similar to other countries where there are large commercial banking interests involved?

Triple I can only suggest that you do your own research.......the Companies office website is a good place to start.......type in a company name you wish to search in the toolbar menu and then look inside Directors and shareholders.  It pays to check out each shareholder name especially if there is a structure who holds the shares in the company you are searching.......
 
You can easily start with the big NZ companies.

Yes i tried that once before but got lost in meaningless subsidiaries...
Some people may call me a cynic but I just don't buy that the RBNZ is completely independant.  To me it appears that everytime the RBNZ enforces a change the retail banks make more profit as a result.
Perhaps I'll try a search again - thanks anyway.

If you want to really screw with the currency lift interest rates. Dollar will get hammered.

Yes, really - raise them (interest rates) enough and the in debt locals will start to default. Thereafter our foreign wholesale funders will cut off supply and the inability to find other sources of credit will cause foreign business investors to vacant the country with what little capital they can recover.

And when foreign wholesale funders cut off supply bank funding spreads will rise, and with the resulting inevitable large fall in the NZD, the RBNZ's current mellow inflation track will rise - result: higher OCR/floating track, higher bank margins = higher mortgage rates = stressed home owners that will be difficult for the RBNZ to assist. NZcollie you need to be aware of the scenarios that can play out, the last thing you want is a dramatic moves.