RBNZ leaves OCR at 3.5% as expected, but says may lower rates if demand weakens; removes talk of future hike

RBNZ leaves OCR at 3.5% as expected, but says may lower rates if demand weakens; removes talk of future hike

By Bernard Hickey

The Reserve Bank of New Zealand has held its Official Cash Rate at 3.5% as expected, but has adopted an easing bias and removed its previous talk of possible future rate hikes.

"The timing of future adjustments in the OCR will depend on how inflationary pressures evolve in both the non-traded and traded sectors," Reserve Bank Governor Graeme Wheeler said a seven paragraph statement 'in between' full quarterly Monetary Policy Statements.

"It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target," Wheeler said.

In the bank's March quarter MPS, Wheeler took a more neutral stance, saying the bank expected a period of interest rate stability and that "future interest rate adjustments, either up or down, will depend on the emerging flow of economic data."

The bank removed any mention of the potential for higher interest rates and did not repeat the comment about a period of stability. Wheeler's comments were in line with those made in a speech last week by Assistant Governor John McDermott, which was viewed as introducing an easing bias.

The New Zealand dollar fell almost a cent to 76.1 USc after the Reserve Bank's statement, although a cut in the dairy payout forecast for 2014/15 by Fonterra was also a factor. Wholesale interest rates fell around 4 basis points and financial markets now expect 30 basis points of OCR cuts within the next year.

Wheeler said lower fuel prices, the high New Zealand dollar and low global inflation had lowered annual inflation to 0.1% in the March quarter.

"Underlying inflation remains low and is expected to pick up gradually," he said.

"Monetary policy will focus on the medium-term trend in inflation. The Bank expects to keep monetary policy stimulatory, and is not currently considering any increase in interest rates."

Wheeler pointed to uncertain outlooks for the European, Chinese and Australian economies and sharp falls in oil prices.

However, New Zealand's economy continued to grow at an annual rate of around 3% because interest rates were low, net migration was high and construction activity was strong, he said.

Wheeler noted that house price inflation in Auckland was elevated, but made no connection with the outlook for interest rates.

He said in March the bank would not change its interest rate outlook because of the Auckland house price surge, saying the bank would instead use its Macro-Prudential tools to control risks to financial stability.

Focus on high currency, weak dairy

Wheeler was more downbeat about the outlook for demand in his comments about the economy than in March.

"However, lower dairy incomes, lingering effects of the drought, fiscal consolidation, and the high exchange rate are weighing on the outlook for growth," Wheeler said. Elsewhere, he repeated the bank's concerns about an unjustifiably and unsustainably high currency.

"The appreciation in the exchange rate, while our key export prices have been falling, is unwelcome," he added.

Economists react

ANZ Chief Economist Cameron Bagrie said the Reserve Bank had softened its tone as expected and adopted an "easier" bias.

"The Review opened the door to a rate cut. It stopped short of an outright easing bias – in that we suspect the underlying forecasts still maintain a flat OCR profile – but it is certainly an easier bias," Bagrie said, adding the bank's comments about underlying inflation still being expected to pick up showed the bias was 'easier' rather than 'easy'.

"An expected pick-up in inflation is inconsistent with an outright easing bias. So we have the potential for a lower OCR but this is not yet the RBNZ’s forecast," he said, adding ANZ still saw an extended period of a stable OCR.

"However, if core inflation remains low (we are watching our Monthly Inflation Gauge closely), in combination with the elevated NZD, dairy sector challenges and an eventual prudential response to housing, a reassessment of current OCR settings would be warranted."

Westpac Chief Economist Dominick Stephens said the Reserve Bank had given its official stamp of approval to the sentiments Assistant Governor John McDermott delivered in a speech last week.

"As the speech explained, the RBNZ has stepped away from its previous neutral stance on the OCR outlook. Instead, the RBNZ has adopted a conditional easing bias. This means that the OCR will remain on hold unless certain conditions are met, in which case it could be cut," Stephens said, adding he saw a 40% chance of two or more cuts over the next year and a 60% chance of no change.

ASB Chief Economist Chief Economist Nick Tuffley said the statement reflected much of what was said by McDermott last wee, but he detected additional nervousness from the Reserve Bank about inflation, "with more focus on tradable sector inflation than seen in the past."

"We see the prospects of an OCR cut this year as more of a 50:50 proposition.  Weak inflation-related data or a strong NZD could push the RBNZ into cutting. More generally, the driver of a cut would be a weaker inflation outlook," Tuffley said.

"The risks of a lower OCR seem larger for the second half of the year, when there is more time for inflation-related data to show any signs that wage- and price-setting behaviour is being affected by the drop in the headline inflation rate," he said. 

"But every OCR announcement from now on should be considered live.  Between now and the June Monetary Policy Statement are key labour market and inflation expectations data.  A rise in the unemployment rate on strong labour supply growth, for example, would signal wage growth is likely to remain subdued for longer. "

BNZ Chief Economist Stephen Toplis said the Reserve Bank had confirmed its easing bias.

"With the RBNZ having an easing bias, we accept that the short-dated yield curve should be inverted," Toplis said.

"However, we believe the likelihood of a cut in June is near zero and that an easing by year-end is far from the done deal the market currently appears to be pricing," he said.

"While we acknowledge the growing risk of a rate reduction, we stick, for now, with our call that rates will not decline."

(Updated with market reaction, economist reaction)

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41 Comments

"It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target," Wheeler said.

But cost of government funding to offset Fonterra's lower payout into the economy may just have to rise if we are tagged as not being able to control our fiscal deficits - just as the trans tasman neighbour comes under pressure from foreign lenders demanding better risk related returns -10yr govt.+20 basis in a matter of days - the cost of credit rating downgrades are the future for anzac cohorts.

With the persistent combination of an elevated currency and depressed dairy, one does wonder how far away a downward GDP revision is.

NZD got hammered. Would have thought this and the Fonterra payout were not surprises.

Yes all pretty much as expected, but the easing bias is understandable, be it that the conditions for it are a high hurdle unless inflation expectations and GDP take a big hit which seems unlikely at present. A long period of stable rates still the mosy likely result I feel - other than dairy, NZ still in a comparitive sweet spot with growth solid, but with fuel costs, inflation and interest rates all low, mostly as a reflection of offshore problems.

Erm not to point out the bleeding obvious, but petrol hit a low in late January of about $1.73. Just 3 months later petrol is 30c higher (a rapid 17% climb) at $2.03. A rise to $2.10 is pretty much now baked in with the fall in the NZ$ and the price of Brent oil creeping up. That is only 5-10c away from where it was bouncing around for a lot of Q4 in 2014. Petrol price rises feed in to inflation figures as I recall......

Except that in my area at least prices can vary by over 20c within 3 km.
We recently used a 40c Countdown discount at a Z station from 172.9c pump price when the local Z station was at 197.9c. Even filled extra containers to get the full 100 litres!

Sorry but largely irrelevant. If they vary around 20c in your area now then they were probably varying around the same amount back in January when the price was $1.73c.

Same goes for fuel vouchers, they have been a constant the last 3 years.

Fact remains that, seemingly without anyone noticing, that petrol prices have surged by 17% in 3 months and will soon be a few percentage off the average they were for the last quarter of 2014.

Then again my main fuel use is for international flights and that is probably 10x the amount I use on the road.

According to this site- http://www.pricewatch.co.nz/default.aspx- you can find 91 octane fuel in Auckland for $1.64 at Gull, and $1.75 at most other brands. I don't recall it getting a lot lower than that in January. Maybe your local station is different.

point is the SD makes your price quote less poignant

Updated with more reaction. NZ$ drop, interest rate drop and ASB saying chance of rate cut later this year now 50:50.

there is huge debate in the USA about the low interest regime and what will happen if they dont get back to normal range before the next downturn. the for increase argue that it is creating asset bubbles and with an era of no failures everything is seen as low risk and priced as such with the weak also surving and not falling away for new companies/products to come on.
the against argue that due to money printing in the EUR it is making their dollar to strong and weaking them against there overseas competition creating an unfair playing field and they need to keep low to keep the dollar in check.
it seems every country is trying to devalue to make give themselves an advantage and to do it they are printing like mad.
only problem is all that money needs to go into assets so is creating bubbles so when the next downturn comes what will happen?

When the next downturn comes, then negative interest rates will be the norm.

Are the main banks predicting what the RBNZ will do, or trying to steer it to what they would like it to do?
Taking the RBNZ statement literally, as soon as data confirms what I assume most of us suspect, that price intentions for the weighted average basket of goods and services making up the CPI are less than 2% (or frankly less than 3% given some arguable need for catch up to make their 2% average target), then they should cut interest rates. It could be that Auckland rents will push things up a little, rates seem to defy economic gravity, the power companies find excuses to put prices whether demand is heavy or soft. But other prices still look very soft to me. Farmers won't be spending. I even suspect the underlying reason behind the fuss in the hospitality industry this week, is soft demand, but who knows. The RBNZ and stats dept should. How many quarters of soft data will the RBNZ need? I would have thought they are past due reacting.

They will need to cut within 8 weeks. Not that this has much impact on fixed interest rates - with wholesale interest rates falling by 4 basis points banks should now be offering published rates of sub 5% 2 to 3 year fixed mortgage rates and rates of around 4.5% negotiated behind the scenes.

Published 3 year fixed mortgage rates now available across the ditch at 3.95%. Given we are now almost $1 for $1 why are our interest rates over 1% higher for a 3 year fixed rate? The multi billion dollar profits being made in NZ by banks means they can handle lowering margins here!

Recession first, then interest rate cuts.

The interesting thing is I would think that in the past that a inflation rate heading towards deflation would have instilled panic, not so today it seems. The Q is why not? So we seem to have a 2 or 3 speed economy. Some sectors are it seems in deflation, meanwhile councils look to a 6.5% increase this year and if ppl have no money to pay that and for other things that will pile yet more pressure on the sectors in deflation already. Then we have some limited areas in housing going loopy and it seems the RB is caught between the rock of stability from a housing bubble in Auckland and the hard place of letting the sectors in deflation maybe shrink severely. Meanwhile our Govn does diddly to help. So yes I think a recession is probable which could in turn pop Auckland's tulip mania and cause financial instability, the very thing the RB wanted to avoid. Meanwhile our Govn does diddly to help.

councils have always been inflating - those in charge of it just can't "cut to their cloth" , and arguably the legacy of debt the each round of councillors/council decisions makes it impossible

Yep. However when more and more new costs or costs that used to be met by central govn are passed down to councils then its hardly surprising they need more $s. The debt the councils have also confounds me, ie not only are they raising rates by 4% or more they are also increasing debt, some to the point they cannot get any more. While I hate to compare a household spending / debt to something bigger, when your debt is maxed out you are severely constrained on what actions and alternatives you have if things so badly. Meanwhile you (as in a council) suck the profit margin out of businesses (what else is a 6.5% rates hike in today's environment?) or off OAPs and low income ppl who get no more $s you shouldnt be surprised when things do not go to well. Meanwhile the central govn lets in 10s of thousands more every year who all impact the Council's coffers with their needs. Frankly I see JK as an amoral retard now, ie he doesnt care what the side effects are of his policies or in-actions just as long as he and his party are OK at the next election. About all else I can say is labour dont seem any better.

Oh and the sectors struggling look to me to be the small businesses like farmers, plumbers etc. So the Q I ask is why is it they continue to vote for a party who is happy to leave them sink? My only thought is because the left are so far left that enough voters ran into the arms of National or NZF (I nearly did). ie for me if the Green's were any less Green I wouldnt vote for them its that marginal for me.

Add in we are in a recession with many businesses struggling, yet the banks profits are as good as a decade ago, if not better. Surely someone should be asking WTF is going on?

So yes, f** it, drop the OCR to 2% (or to match OZ) and let the tide go out on the thieving banks who hide behind it. Let them swim naked in the tide of voter/consumer discontent.

I agree drop interest rates, it won't affect an already overcooking Auckland property market, the rest of the country is in recession.But will they?National have allways had a plan which involved making things difficult for small business, and moving towards corporatisation. To me what they are trying to do is a dangerous experiment.

as long as you can handle the destruction of your capital, the lower the interest rate the more deflation. We risk a Japanese lost decade or two.

http://seekingalpha.com/article/824971-falling-interest-rates-actually-d...

http://www.safehaven.com/article/11601/the-mechanism-of-capital-destruction

Look at the Baltic dry index, something is horribly wrong, especially when Case New Holland cut machinery production by %40

http://www.engineering.com/AdvancedManufacturing/ArticleID/10025/Caterpi...

The applicable levels of both currencies has zero to do with interest rate conditions between the two countries bigblue ? And bank margins on retail mortgage rates are now back to and in some cases, below what they were earning before the GFC when the world was mean't to be a better place. There's damn all more coming from that avenue barring a further fall in their offshore funding spreads, it will require further downside in swap rates (and forget that later in the year if the Fed hikes) or OCR cuts which would have to be near that likely Fed timing anyway to provide time for the RBNZ to assess/confirm that they need to. Certainly possible, but it will be in the RBNZ and market's hands, not the banks.

Maybe it's time to finally admit that the economic system has structural issues and economic growth is over.

I don't see how forcing inflation in any direction solves any problems. It's just further intervention in the "market". How many decades of intervention is needed before one becomes aware of the insanity - doing the same thing over and over again and expecting a different result.

Maybe it's time to realise that the cancer can't be treated with bandaids and it's time to switch the life support system off.

I agree up until you get to "market" frankly I dont think the "market" gets growth is over any more than Govns do.

I totally agree Steven but we have to admit that the market ultimately doesn't know shit in the first place. I think our belief in the "market" is one of the structural issues :)

The market is not unfettered from Political and bureaucratic controls so it is a highly distorted place.....If you don't want distortions then ultimately you have to allow the market to have its normal ups and downs.....the bureaucrats of the past didn't like the normal market corrections that would happen as Governments would have to have a tidy up and trim back the extravagance that had been created in the public system.......the current market is a reflection of the distortions.....at the end of the day the market is about participants who buy and sell.....but you have to recognise that the prices have been influenced by factors that have changed all values.

There is an increasing desire for the bureaucrats, banking sytem to want to control everything, .It creates stupid rules and stupid industries that in my opinion should not exist. A free market system is not perfect but it allows failure and rewards the smartest. I believe it is wrong to think that there will never be another economic recession just because governments are sucessful in controlling everything. Will QE solve short term problems but amplify distortions that may lead to a more radical correction. I believe that risk and true market prices exist in spite of all the attempts to control.

Actually I think a free market rewards the most amoral, letting them act like sharks feeding on others.

Or, actually Govns setting rules and regulation to reduce distortions. To give stability and level the playing field, you place limits, that is society's choice as clearly no limits has an even worse outcome..

Here's an example of the bureaucratic nonsense in an email I've just recieved from worksafe.
This is a message from Worksafe as the duck shooting season opens tomorrow.

This weekend is the beginning of the duck shooting season. It is timely to remind farmers of commercial farms what their obligations are under health and safety legislation. This advice applies to visitors - people who come with your implied or actual consent to your farm for no commercial or business purpose and who have not paid you (directly or indirectly) to undertake an activity.

The first thing to take into account is that this is not a paperwork nightmare. No lengthy form-filling is needed, nor is there any need to sign people on and off the farm. It is really a matter of thinking about where the hunters will go, identifying hazards and risks the hunters wouldn’t reasonably expect in those areas, and warning them about those risks and how to avoid them.

Our recommendation is that you have a conversation with the hunter or hunter in charge of the party to pass on that information. Make a note in your farm diary about what you told them. Most people usually ring up the night (or during the week) before to make sure it’s all ok, so that’s a good time to have the discussion. It doesn’t need to be lengthy.

What sort of things should you warn them about? Remember - it is the things they wouldn’t reasonably expect (so if they are townies you might have to make allowance for that) in the area(s) they will be in. Here are some examples:
• Dangers from things like tree-felling, spraying or other work. If there is tree felling in another area, are the trucks using the same tracks?
• Areas of instability, such as paddocks, with unexpected tomos or those subject to landslips.
• Aggressive stock that are near where they will be hunting.
• You might also let them know about communications (eg if there is no cell coverage) so they can make alternate arrangements if need be.

You need to make sure that all the people who are in the area (staff, contractors, other visitors / hunters) are aware of each other. It’s also a good idea to get an idea of their timings - tell them they should let you know if these change.

If a visitor trips over a tree-root or stone, a property owner or occupier is unlikely to be held responsible for the other person's carelessness. In addition, if the property owner or occupier could not reasonably have been expected to know of a hazard, they cannot be held responsible for any harm that occurs to any customer or client.

Remember the general rule - as the person in charge of the workplace you are legally required to point out specific hazards on the farm, which you know could harm the person and which the person wouldn’t normally expect to encounter.

The information can also be accessed on the Safer Farms website: http://saferfarms.org.nz/news/its-duck-shooting-season/

What would we all do without these clever government people telling us dummies what we can and can't do in our free time on our own properties. This is a classic example of an out of control government department. And for the record I normally let 6 people go shooting on my farm, i never tell any of them that the others will be there shooting as well, and i never mention the cliff or the wild bull.................

second time in two different sites I've read this "implied consent" , is it something in the water? or are people actually getting that much stupider.

There is no such thing as "implied consent" it is an Oxymoron.

If there is a right of way through your farm, or if the farmer has seen ppl hunting on his farm before and said nothing then that would be implied consent.

No, your farm is an industrial site and covered by H&S. Ergo you have a duty to keep ppl who access it safe and free from harm. If you have not told anyone of dangers, and it seems knowingly so you wont have a leg to stand on in court if something happens.

Hey look steven, everyone knows this. Why are taxpayers paying these morons to teach us how to suck eggs! Most duck shooting accidents involve firearms issues, not identifying targets, drinking alocohol etc all covered by the firearms code. I would never let anyone on a farm that knows nothing about the property or make sure they are with someone experienced. You just don't let someone go on your property with a gun without showing them around or explaining where the boundary fence is, this is just common sense. Why are we paying people to tell us this???

I would suppose that there are enough accidents to cause the warnings. "to tell us this" because there are enough ppl who ignore or simple are not aware of their responsibilities. NZ has a bad safety record as well. As an engineer I have personally had the HSE up my ass looking for fault and honestly you dont want to go there, its mega stressful.

What is the government trying to do ? Create templates for running farms that mean people with no experience can run them? you can't, it's just not that simple. I could quote quite a few rules in the worksafe book that i think are wrong for my farming operation, they may not be wrong for another. I won't be following these rules as I more interested in what I think is safe for myself and my worker (also considering what he thinks is safe as well) Basically what we are saying is our jobs are dangerous, it's our arse on the line. We have the right to do what we think it right to protect our safety on our farm. These rules may work for government run farms with high staff turnover, but why have a go at farmers with no accidents in their history? Surely they are doing something right. I believe it's just an example of government job creation. On a building site in town who provides the safety for the scaffolders? Is it ,in some cases ,more dangerous to put up the scaffolding , than to do the job?

The HSE takes the stance that you only have to do what is reasonable, practical and to an extent cost effective. What it will come down to is if something happens you have to justify in court your position. Meanwhile you will be up against ppl who will look stupid if they lose, ergo they will try and make sure they get you.

I think creating templates for work practises is not for the workers ( who have experience in their industry) but for the management, to try to understand work, in a way that can be documented because, many of them, themselves have no experience working in their industry. This is corporate culture.