RBNZ cuts OCR 25 bps and says "some further easing seems likely"; says further fall in NZ$ still necessary; cuts GDP growth view to 2.5% from 3%

By Bernard Hickey

The Reserve Bank of New Zealand has cut the Official Cash Rate by 25 basis points to 3% as widely expected and has foreshadowed more rate cuts later this year, but the bank's comments were seen as less 'dovish' than expected and wholesale interest rats bounced around 5 basis points.

The bank also weakened its call for a lower New Zealand dollar, which led to an immediate rise of around half a cent to 66.2 USc.

The statement was viewed as less 'dovish' than expected because the bank said inflation is headed back to near 2% by early next year because of the fall in the New Zealand dollar.

The bank chose not to cut by the 50 basis points that some had hoped, arguing that the sharp fall in the New Zealand dollar this year and the end of the oil price slump would help lift annual inflation to close to the mid-point of the bank's 1-3% target range by early 2016.

Banks cut their floating mortgage rates by 25 basis points (see more here from David Hargreaves) and most economists expect another 50 basis points of OCR cuts by the end of the year.

Despite the currency fall, the Reserve Bank said further depreciation was needed given the weakness in commodity prices since the Reserve Bank's last full Monetary Policy Statement (MPS) on June 11.

Governor Graeme Wheeler said global economic growth remained moderate with only a gradual pick up in activity forecast. He highlighted recent developments in China and Europe that had led to heightened uncertainty and increased financial market volatility.

The New Zealand economy was growing at an annual rate of around 2.5% and was supported by low interest rates, construction activity and high net migration. The bank saw growth running at around 3% in its June MPS.

"However, the growth outlook is now softer than at the time of the June Statement," Wheeler said in the bank's seven paragraph 'in-between' statement, which is more limited than the full quarterly Monetary Policy Statements.

"Rebuild activity in Canterbury appears to have peaked, and the world price for New Zealand’s dairy exports has fallen sharply," he said.

Wheeler noted headline inflation was currently below the bank's target range, "due largely to previous strength in the New Zealand dollar and a large decline in world oil prices."

He said inflation was expected to rise towards the mid-point of the range by early 2016 because of the New Zealand dollar's fall and those lower oil prices dropping out of the annual figure. "A key uncertainty is how quickly the exchange rate pass-through will occur," Wheeler said.

He commented that Auckland house prices continued to increase rapidly, but inflation outside Auckland remained generally low. "Increased building activity is underway in the Auckland region, but it will take some time for the imbalances in the housing market to be corrected," he said.

The significant fall in the New Zealand dollar since April and lower interest rates had significantly eased monetary conditions, he said.

"While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices."

The Governor made no mention of the currency being unjustifiably and unsustainably high, as he has done in previous statements. The bank's June 11 MPS said "significant downward adjustment is justified" and needed to put New Zealand's net external position on a more sustainable path.

There was no mention of the net external position in today's statement. The Governor then summed up by saying: "A reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely."

The bank's June 11 statement said the first cut of 25 basis points to 3.25% was needed to ensure medium term inflation converged to the middle of the target. It also said then that it expected "further easing may be appropriate," which would "depend on the emerging data."

There was no mention of further easings being dependent on emerging data in today's statement.

Parsing the statements

The key differences between the June 11 statement and today's July 23 statement:

1. RBNZ cut its current GDP growth view to 2.5% from 3%

2. Wheeler called for further NZ dollar depreciation, but dropped the tougher language about a "further significant downward adjustment being justified"

3. The bank said the Christchurch rebuild activity appeared to have peaked, which it did not mention in its opening statement on June 11

4. The bank said "some further easing seems likely," which was slightly firmer than its June 11 statement, which said further easing "may be appropriate," but would "depend on the emerging data." Today's statement included no such caveat.

Economist reaction

ASB Chief Economist Nick Tuffley said the Reserve Bank had maintained a clear easing bias. He said the immediate lift in the New Zealand dollar and New Zealand wholesale interest rates after the statement, likely reflected "the market unwinding a small speculative position of a 50 basis point rate cut."

"Given the RBNZ has signalled further rate cuts, and we see downside to the RBNZ’s inflation outlook, there remains scope for the NZD and NZ interest rates to continue to move lower over time," Tuffley said.

Westpac Chief Economist Dominick Stephens said the bank was clearly signalling deeper cuts than the 3% mid-point suggested in its June MPS.

"The RBNZ's policy guidance is now a rather blunt -- "At this point, some further easing seems likely." This is a clear signal for another cut in September," Stephens said.

"The RBNZ generally softened its rhetoric on the exchange rate. The RBNZ moved away from the key words "unjustified and unsustainable", instead opting to to say "further depreciation is necessary," he said.

"This Statement was not as dovish as markets were prepared for, particularly concerning the exchange rate. The exchange rate has risen half a cent, and swap rates have risen five basis points," he said, adding he didn't agree with the OCR profile implied by that market reaction.

"There was nothing in this statement to cause us to alter our forecasts. We are not surprised that the RBNZ sees the need for further cuts. However, we are also unsurprised that the RBNZ has moved relatively cautiously at this one-page OCR Review. We are braced for bolder articulation of the RBNZ's plans at the full Monetary Policy Statement in September, or in a speech in the week or two ahead."

Stephens stuck with his view the OCR would fall to 2%, but dropped his suggestion a 50 basis point cut was possible in September.

"The RBNZ’s slightly more cautious mood does, however, argue against the risk of a 50 basis point OCR cut, which we had been flagging. Accordingly, we will shift to forecasting 25 basis point OCR cuts at each RBNZ meeting between now and next January," he said.

ANZ Senior Economist Mark Smith said the Reserve Bank's easing bias was clear to see in the statement, "although it was perhaps not as dovish as some had expected."

Smith said ANZ still expected the OCR to return to 2.5%.

"The RBNZ has upped its rhetoric on cuts – “further easings seems likely” is a step up from “further easing may be appropriate”, but it doesn’t smack of them being in a hurry to cut," Smith said.

He said the bank's language on the New Zealand dollar was changed "with the market-sensitive words of “unjustified” and “unsustainable” not included."

"The RBNZ still wants the NZ$ to fall given the commodity price backdrop, but it appears the RBNZ’s pressing need for a sharp decline has eased."

BNZ Economist Craig Ebert welcomed the Reserve Bank's more measured tone on further rate cuts and saw two more cuts this year, including one on September 10 and a 50% chance of another on October 29.

"We too can see CPI inflation rising to “problematic” levels in 2016/17. It’s still an open question as to how soon this might show – something the Bank also queried in today’s OCR commentary with “A key uncertainty is how quickly the exchange rate pass-through will occur.”," Ebert said.

"However, we can certainly see inflation threatening the top end of the 1.0 to 3.0% target band by later next year (providing GDP growth hangs in there). This potential is what makes the September MPS so very interesting," he said.

Political reaction

Labour Finance Spokesman Grant Robertson said the rate cut showed there was no encore to the 'rock star' economy.

"Today's interest rate cut comes off the back of record lows in dairy prices, plunging business, consumer and employment confidence, dropping exports, a decrease in advertised jobs and stagnant wage growth," Robertson said.

"That the Governor has chosen to cut rates despite the risk of pouring petrol on an inflamed Auckland housing market shows just how serious New Zealand's worsening economic outlook is," he said.

"Some economists have speculated that the OCR could soon be cut to as low as 2 per cent. That is 50 basis points lower than what the Official Cash Rate was at the height of the Global Financial Crisis. That wouldn't be happening if the New Zealand economy was in good shape. "

New Zealand First Leader Winston Peters said the Reserve Bank should have cut by 50 basis points.

“This second cut to the OCR is all a little too late and too little,” Peters said.

“Decisive action like a 50 basis point cut was needed, yet this is the same Reserve Bank Governor who last year increased interest rates four consecutive times," he said.

“Everything is not fine and dandy with the economy as Mr Key and his minions who banked the farm on China wish to believe.  The news out of which gets grimmer by the day."

Green Co-Leader James Shaw said the bank's rate cut exposed the Government's failure to enact long term measures to encourage productive investment and job creation.

“National’s lack of long-term economic thinking means short-term jolts are felt more sharply throughout the economy," Shaw said.

“The risk from a lower OCR is that it fuels Auckland’s housing market. The best way to stop this would be to introduce a proper capital gains tax and restrict land sales to non-resident overseas buyers – because National’s complacency towards property speculation is keeping first home buyers out of the market."

(Updated with parsing the statements, NZ dollar fall, Economist reactions, Political reactions, chart)

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53 Comments

The problem with seeing petrol as inflationary is it is an overhead like the OCR so in a wallet constrained environment not ignoring petrol will be deflationary for sectors already suffering a lower NZD. The only Q now is is the RB is as seriously behind the curve as it appears to be, guess its a case of hindsight is 20/20.

:(

I guess Auckland house prices constitute an overhead if one is in receipt of a devaluing fiat salary - where are the corrective measures other than to increase the pace of it's devaluation (lower purchasing power)?

Sadly, Graeme Wheeler has given up. He tried to 'encourage' political action to rebalance the New Zealand economy by pushing interest rates up, but that just took the pressure off Government, who chose to blame the RBNZ for its economic failings rather than do something in tandem with the RBNZ to enact change. Now, Graeme Wheeler can say " I tried. It's not my fault. Here's the low interest rates you all asked for, and if the economy falls further, I'll give you more, and whatever happens to the economy from now on - you asked for it"

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19

But he gets to keep his NZD +600,000 salary where as poor Janet Yellen with the weight of the world on her shoulders has to settle for a USD 199,700.

So what? That is a pointless comment. US government and other official positions are known for their below market pay checks. Bernankes first public speach (40mins long) after handing over to Yellen earnt him 250k USD... They will earn massive amounts pre and post their time spent as fed chair. Im guessing you arent happy with the 600k paycheck awarded to the RBNZ chief. Given then importance of the position and need to attract the most suitable candidate.. 600k is a drop in the bucket.

Bernankes first public speach (40mins long) after handing over to Yellen earnt him 250k USD...

I guess that's the cost of public servant capture in a reserve currency nation, after the fact. New Zealand, after all, is a rounding error economy in the scheme of global affairs and probably has to pay peanuts (as you imply) upfront .

Correct Mr Hulme. And to justify his salary he thinks he better start 'creating' issues that he then has to 'solve'.

We would be all better off if he went on extended leave... go fishing for six months.

So....take Graeme Wheeler out of the equation and let the market set the price of interest rates according to free-market capitalism rules, then? Good idea! Where do we all think New Zealand commercial; mortgage rates would be without RBNZ 'interference' ?!

The market moves money rates before the RBNZ does. There is a role to provide financial stability but the economy certainly does not need Wheeler acting like 'King Canute' every six weeks.

Economies and their fortunes ebb and flow. It's part of the free market system that provides the world with so much. RBNZ governors just aren't as important as Mr Wheeler thinks they are.

I think the ANZ carnival barkers dictated the downward course as Mr English confirmed.

To paraphrase an American revolutionist: Give me inflation, or give me death!

https://en.wikipedia.org/wiki/Give_me_liberty,_or_give_me_death!

PS and forget liberty - it's so last century.

bw, The rates would be where the rates would be, reflecting the relative health of our economy; things like level of risk and credit worthiness of borrowers would play - old fashioned principles of Free Enterprise which have latterly proved just too difficult for modern vested interests to deal with. The RBNZ is just a creature serving them.

I think that if we offered lower salaries to our management, we would attract "enthusiasts" foremost. Then, among the enthusiasts, we then look for the most expert and experienced. I trust people who are motivated by their passion first, not a drive for money or position. If we pay peanuts we attract primates. If we pay "caviar and filet mignon" we attract ferrets (predators).

I can excuse mistakes by enthusiasts because I know thqt they are gutted when they screw up. Amongst the ferrets, they will often screw up on purpose to advance some weird agenda.

Incidentally, I am not referring to Wheeler. He seems to be doing a good job. I would however, like to see him get a 50% pay cut. Would he stay on the job?

If we cut all of the top public salaries in NZ by 50%, it would be interesting to see who would stay and who would spit the dummy?

The inflation move back to near 2% by "early" 2016 is the surprise and may mean we only see a couple more cuts unless the NZD now runs away on the upside which is hard to see (or poor dairy auctions continue past year-end). NZD's up 50 points and swap rates up 5bps after the announcement. So bearing in mind no one would be floating in this environment with the gap between the short-term rates and floating favouring staying short, probably not much of an impact here for most mortgage borrowers.

He said inflation was expected to rise towards the mid-point of the range by early 2016 because of the New Zealand dollar's fall and those lower oil prices dropping out of the annual figure.

How convenient. Will there be a compensation interest rate rise thereafter?

Inside 9months a rise of 2% in CPI? from all but 0% now???? Then to add to such un-believabble inflation, the economy already suffering from increased fuel costs will get double whammed by higher borrowing costs? yes this makes so much sense, um not. classic case of looking at core inflation and not CPI.

Is he smoking something?

And ignoring other important domestic rising cost factors.

The scale of our housing market was revealed today in the March 2015 data out from the RBNZ. The value of all houses is 'now' $791.2 bln, and that value grew by $66.5 bln in twelve months. That is value growth going up at the rate of $182 mln per day Read more

Not sure about the use of the word value there:

That is value growth going up at the rate of $182 mln per day

Perhaps they misunderstand the idea of value which apparently went down by $182 mln per day. Or is me that is confused?

Semantics are subject to dispute, challenge Chaston - the author. I wished to make another point which could not be misinterpreted - note the second comment in the thread further up the page.

I'm not so sure on that Stephen, he may well take the view that a bit of time above the mid-point might be fine if dairy stays down or the NZD doesn't stay down. I think all it signals at first look is that a couple more cuts to 2.50% feels about right rather than a move to 2.0%?

I am sure you are not sure - neither is the governor.

2.5% seems very likely, yet if inflation is supposed to rebound so fast that you'll blink and miss it, yeah right. Personally I think with no more money in ppls pockets and worse petrol costs taking more out upfront that we will see deflation in others areas to make the effect a big fat 0%.

So the Q is this time next year will the RB have finally learned this time its different?

Perhaps, in the Interest of Squawklanders, we should run a sweep on when the median house price reaches the Magic Million Mark? After all, the less the cost of credit, the faster the bubble expands to at least some extent. So the odds shorten.....

One Million Dollars! We're Rich!

As a Dorklander, I can appreciate the Ponzi logic at work, scary

At least some in Auckland can remain Guang Ho until at least Oct 1.

Hi Waymad
I say Feb 2017- I assume you mean barfoots data
Otherwise May or June 2017 if REINZ or QV data

Don't get caught by the hype.

Gravity will always catch up...

Interest rates are not the problem when they are this low, it is principal repayments that are.

$500,000 @5% for 20 years is $760pw

$595,000 @3% for 20 years is $760pw

$715,000 @1% for 20 years is $760pw

So if the current $700,000 house needs a $500,000 mortgage, the above figures are the difference it is going to make to a buyer if interest rates drop further. ie very little difference.

But look at the reverse

$425,000 @7% is $760pw

$365,000 @9% is $760pw

So subtract 7 years inflation back to 2008, and reduce the deposit size proportionately and we have a house price about $450,000 (say $300k mort, $150k dep), ie about where prices were.

So do you think we will have mortgage interest rates below 3%?

How far will hype take us?

Finally, someone has changed down a gear half way up a steep hill!

Is that One Tree Hill or another?

Higher prices for oil ... is a sign of improved economy*.

(during >$8 dairy payout PCR was put up because of improved economy*)

Mr Wheeler moaned on and on about people buying houses... paying too much money he said... moan moan moan. (Of course what business it is of his that a person should buy a house if they want to is anybody's guess).

Now he has cut interest rates a second time. Making it easier to pay more for a house, or buy a second (or third etc etc) house.

On behalf of all first-time home buyers: thank you Mr Wheeler.

On behalf of all PIs: thank you Mr Wheeler.

And on behalf of those who enjoy all the moaning that goes on on interest.co.nz by the 'we know best brigade' thank you Mr Wheeler.

Cue scarfie, Kate, keyser soze, stephen et al...

It is Mr Wheelers' business. As Governor of the Reserve Bank, it is his job to monitor economic performance and raise flags, where he feels that is required. That's his job.

And you think you are 'safer' 'cause Mr Wheeler is doing his 'job' the way he does it?

It's that fear people have that enables Wheeler to get away with his constant meddling in the economy. He's an unelected government employee with way too much say and influence.

We would all be much happier and get on with life's activities better if he went fishing for six months. We don't need him giving us his opinion every few weeks and then setting policies with no accountability to people who can not vote him out.

RBNZ bosses are gloomy buggers at the best of times but Wheeler is one for the ages and pokes his nose in more than most. Muldoon would be proud of Wheeler's meddling in the economy.

Yes , I am comfortable with Mr Wheelers performance. Seems a safe pair of hands and keeping things on track in difficult times.

moa man. Mr Wheeler's job is laid out in s8 RBNZ Act 1989: http://www.legislation.govt.nz/act/public/1989/0157/latest/whole.html#DL...
to, achieve and maintain stability in the general level of prices. The policy targets in s9 are intended to support his primary function viz. s8. But since 2003 the RBNZ has been using s9 to succour favourites.

Your Landlord. It is the business of Mr Wheeler and of the government if hard working young New Zealanders can't afford to buy a house in their own town. Or if they do manage to, then spend a lifetime being cash poor.

So Mr Wheeler cuts interest rates (which fuels house prices) and imposes tough deposit and LVR criteria which directly hit "hard working young New Zealanders" trying to buy a house!

Both actions make it harder. But you can't have it both ways KH. With an economic 'friend' like Wheeler, home buyers wouldn't want an enemy in the RBNZ would they?

About time, let's get this bubble cranking.

Imagine playing a game of pool where there is a referee.
The referee has the power to increase or decrease the balls on the table when they feel like it.
This allows the referee to decide who is going to win
Now look at how banks, led by Central banks, do exactly the same with economies. Increasing and decreasing the money that people need to play the market game
That allows them to decide the winners and loosers
Those that control money and its creation control the winners and the loosers.

Im starting to see a new problem on the horizon. What do I do with all this new money in my pocket?!?! - Ta, life is good.

Give it away and do good - it won't be worth anything in the future.

Oh Kate... please, please... cheer up a bit.

By "cheer up" do you mean extend and pretend with the best of them? The real problem as I see it is the folks with (what they consider to be) a lot of the extra folding stuff actually end up doing just that.

Whereas if they just walk down to the Sallies and hand it over, we all (them included) benefit.

The Sallies! Heck, well... that explains a bit.

They do a good job certainly but, you know... thinking about it... I've never met a happy Sallie. They all seem to put their uniforms on and immediately go in to a fog of gloom. Must be a requirement of the job, I always guess.

No need to "extend and pretend" though Kate. It's just that there is this unrelenting, always-present sense of blackness ... no... a greyness... surrounding ALL your comments. A sense of doom. Mind you... you share that characteristic with numerous posters on interest.co.nz. Perhaps that's why you are so prolific? (By-the-way, I admire your ability to post so much. How do you do it I wonder... us landlords are as busy as the clappers providing great houses for our tenants so we don't get much time free to post.)

Here's a suggestion: How 'bout you think of something that brings you great joy in life... then relate it to a topic on interest.co.nz... then do a post that is about the thing that brings you great joy. For example, if you like coffee and if the price of coffee falls, rather than write a gloomy post about all the coffee workers who are losing their jobs, write a post about how much more coffee you will be able to buy for your dollar. Leave the workers' worries to someone else.

I guarantee you will feel better about life... happy... like me :)

All the best there Kate.

PS: Is this the longest post I have ever done on interest.co.nz? Look what you have prompted me to do!

Did you up the medication today YL?

Ha ha, cheers frazz, I always know I can get a laugh somewhere here.

....you sound just like my therapist!

rastus... you jest? Surely? Do you attend therapy? Well, all the best to you.

But your therapist wouldn't be like me mate. I would be too inclined to kick someone up the arse and say "give it (whatever they are interested in) a go."

Best I leave the 'therapy' work to others I think. NB: not the bloody Sallies though!!

lol Landlord - glad to have prompted you to think and express yourself!!!!

Actually that is what I do for a living.

Presently I'm contracted to teach two external (i.e., students from home) uni courses (from the comfort of my home!), so in between responding to the discussion board on each of those papers at the moment - discussions on not so unrelated topics as this, generally by young people just starting to try and make their own way in the world, who look at the world through very different lenses than perhaps you do.

I also complete various written tasks for consultancy assignments (I'm always at my computer), and I also do some mediation/negotiation related work - face-to-face stuff.

I like to interact with as diverse a community as I possibly can (i.e., this would be that 'something that brings me great joy in life'). The interest.co.nz community suits me for that reason.

So, I am really, really happy with my own lot - as I am really, really independent. But the world is a much bigger place than the cozy niche I have carved out for myself.

Give it to Barfoot and Thompson, keep the bubble going...

People complaining here about Interest Rates and RBNZ and Wheeler

It would be most instructive if either Mr Chaston or Mr Hargreaves or Mr Hickey went down to the local daily newspaper and dug through their archives and microfiche records for 1980-1984 when interest rates were 18% plus, and reproduce here for us some of the commentary of the times - reflecting on the very same topics - Interest Rates, RBNZ and the Governor of the day

I reckon 1987 would be better....when it all fell over in Oct 1987 and interest rates went to around 21% it was survival mode....the people who were more established didn't suffer the same as the young people and for farmers it was like a blunt instrument strike that nicked the jugular.!!

Inflation is alive and well.. It stalks the periphery, unseen by central banks and governments. Its movement only shows up in compliance costs, power bills and rents .. it has the RBNZ in a corner, trapped by its fiery gaze .. they have nowhere to run...