RBNZ cuts to 2.5% as most expected; leaves interest rate track forecast unchanged; lowers inflation track forecast; cites clause in targets agreement on financial stability in arguing why it won't cut again

RBNZ cuts to 2.5% as most expected; leaves interest rate track forecast unchanged; lowers inflation track forecast; cites clause in targets agreement on financial stability in arguing why it won't cut again
Reserve Bank Governor Graeme Wheeler at the December 10 Monetary Policy Statement news conference in Wellington.

By Bernard Hickey

The Reserve Bank of New Zealand has cut the Official Cash Rate for a fourth time to 2.5% as most economists expected, but it has forecast it will hold it there until at least the end of 2018 despite also lowering its inflation forecast.

The Reserve Bank increased its forecasts for GDP growth, but saw inflation not returning to the centre of its 1-3% target band until December 2017. In its September MPS it had forecast a return to 2.1% by September 2016.

The bank took the unusual step of citing clause 4B of its Policy Targets Agreement (PTA) that specifies it should take into account financial system soundness when setting monetary policy.

"With inflation expected to increase steadily, consistent with the inflation target, a much sharper adjustment in interest rates than projected risks being inconsistent with clause 4b of the PTA, and could not change near-term inflation outcomes," the bank said in its full Monetary Policy Statement.

The statement was seen as hawkish by economists and painted the Reserve Bank Governor as a reluctant cutter, which pushed the New Zealand dollar up almost a cent to 67.4 USc. Financial markets had positioned for a cut and 13 of 15 economists had expected a cut, but the decision to leave the rate track forecast unchanged and to accept a later return to the centre of the 1-3% target band surprised some economists, who are concerned the Reserve Bank is over-estimating future likely inflation and therefore holding interest rates too high.

Governor Graeme Wheeler said global economic growth was below average and inflation was low, despite stimulatory monetary conditions.

New Zealand's growth rate had softened through 2015, but recovery in export prices, a recent lift in confidence, and increasing domestic demand from the rising population were expected to see growth strengthen over the coming year, he said.

Wheeler warned that the New Zealand dollar's rise since August was "unhelpful and further depreciation would be appropriate in order to support sustainable growth."

He noted house price inflation in Auckland remained high, "posing a financial stability risk. "

"Residential building is accelerating, and recent tax and LVR measures are expected to reduce housing pressures.  There are some early signs that Auckland house price inflation may be moderating," he said.

Wheeler said CPI inflation was below the 1 to 3 percent target range, mainly due to the earlier strength in the New Zealand dollar and a 65% fall in world oil prices since mid-2014. 

"The inflation rate is expected to move inside the target range from early 2016, as earlier petrol price declines will drop out of the annual calculation, and the lower New Zealand dollar will be reflected in higher tradables prices," he said.

Risks to outlook

The Reserve Bank cited a number of uncertainties and risks to this outlook, including the risk of low dairy prices for longer and an El Nino drought.

"Risks to the domestic outlook include the prospect of net immigration staying high for longer and of household expenditure picking up on the back of strong house prices," Wheeler said.

"Monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range," he said.

 "We expect to achieve this at current interest rate settings, although the Bank will reduce rates if circumstances warrant. "

In the MPS the bank listed the potential risks to its outlook in more detail and specified how the bank might react if they eventuated.

Higher net migration would only have modest implications for monetary policy,  while a severe El Nino might justify more accommodative monetary policy if the currency did not adjust, it wrote.

A further slump in global growth an export prices could also warrant further easing, particularly if the New Zealand dollar did not adjust.

The bank also noted it expected consumer spending to remain in line with income growth.

"However, a stronger pickup in consumption is a plausible risk, especially if high net immigration, low interest rates, and rising house prices combine to increase confidence and willingness to borrow for consumption," the bank said.

"Such a scenario would warrant less monetary stimulus than is currently projected," it said.

Economist reaction

ANZ Economist Cameron Bagrie, who had picked the OCR would be held, said the tone of the statement suggested more balance about the future track of interest rates, rather than expecting further cuts.

"An easing was delivered, but it was of the hawkish variety," Bagrie said, adding he also now saw the OCR on hold for an extended period.

Bagrie said the New Zealand dollar could rise even further in coming weeks.

"We’d expect more of the same over the coming weeks given improvement in the tenor of local data and the fact that a Fed hike is nearly fully priced," he said.

"That will potentially become a sticking point, given the TWI is already trading 3 big figures above the level the RBNZ is assuming for Q1," he said.

Westpac Chief Economist Dominick Stephens, who had forecast the cut, said the Governor's statement appeared to show the bank would cut again if needed.

"Actually, the detail of the Monetary Policy Statement portrayed a central bank that is reluctant to cut," Stephens said.

"We think the RBNZ will indeed be surprised on the downside by inflation, GDP growth, and house prices - and consequently, we remain steadfast in our view that the OCR will fall to 2.0% next year," he said.

"That said, the RBNZ's current stance does call into question the timing of any move below 2.5%. We are currently forecasting OCR cuts in March and June - we will consider whether this timing remains the most appropriate forecast as we digest the Monetary Policy Statement more fully."

ASB Chief Economist Nick Tuffley also stuck with his forecast that the Reserve Bank will have to cut again in June and August next year to 2.0%.

"The low inflation forecast, coupled with a relatively neutral tone, does suggest the RBNZ is possibly more comfortable with inflation not reaching the mid-point of the target band," Tuffley said.

"However, with the risks clearly skewed to the downside (in our opinion), this is a risky forecast as it leaves little wriggle room," he said, describing the 'hawkish' tone of the statement as the reason for the currency's jump this morning.

(Updated with picture, charts, currency reaction, economist reaction)

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There you go - that's your guidance. 2.0% forecasters caught with pants down, and look at the NZD soar! CBA very naive to place so much weight on today's move - it was always going to be guidance that was of interest.

look at rbnz inflation forecast vs actual... Theyve pretty much just drawn a step line bucking a 5 year trend back into their target zone, justifying it on a bunch of assumptions that wont happen.

All central banks around the world have been shown to be wildly optimistic in their predictions. Its a confidence game, if people realise deflation is on the cards and stop spending it will accelerate the deflation and you get japan in the 90's (and still to today..) or a 1930s depression...

Part of this is that they will want to keep something in reserve. It also sends the borrow now and spend message.

The thing is the effect of the oil bubble bursting hasn't been fully realised yet, nor the collapse in commodity prices. Things are going to be tough over the next 3 years unless people have the confidence to spend.

Also given that the world is flooded with very cheap money the subprime collapse, and now the oil and commodity collapse are all bubbles. What other bubbles have formed and are due to collapse? How long until it's discovered that the Basel III capital reserves are insufficient due to incorrect risk weightings on assets such as houses?

It's going to be an exciting 3 years.

Did the RBNZ really say "it will hold it (OCR) there until at least the end of 2018" as mentioned in the 1st paragraph ? Because a) that would be a foolish prediction so far out and b) this article states several potential scenarios where Wheeler would further lower the OCR

Predictions, Promises and Postmortems ? Meanwhile dealers and bankers make money, heaps of it..

"The Reserve Bank cited a number of uncertainties and risks to this outlook, including the risk of low dairy prices for longer and an El Nino drought."

I see a trend in media blaming the weather. Im not buying it. Factors outside of this country influence dairy prices more than the weather here does. Sure its a factor, but I recon its so insignificant its not worth mentioning (or trying to magic away an unnecessary OCR drop) . If El Nino results in lower NZ production, this would apply upwards pressure on dairy prices ya... not negative


Gee interest rates falling, who would have thought.....

I must say I find it truly bizarre that the RB can dig out a clause to claim that ZIRP in NZ is 2.5%. So if inflation were to surprise to downside, the response will be to do nothing.

Wow , now we will see sparks fly !

The Banks traditional margin on the cost of funds is 33% (for mortgages), although the Aussie banks are currently ripping us off .

The OCR at 2,5% implies that the Banks 1/3rd margin is 0.825% which makes a mortgage rate for secured lending of 3.325%

Now that's really cheap money

$100 says they cut again in 3 months.

$100? - not too confident?

First rule of gambling: Don't.
Second rule of gambling: If you really must, only play what you can afford to lose.
$100 bet seems steep to me. It's not something id' be prepare to misplace, somewhere.

Replacing easily 100$ after tax, gst, rates, interest and expenses the wife's manicure and hairdo, not worth working for, so might as well take that bet.

Are you paying in NZ, AUSSIE, USA, dollars as fair exchange is robbery in some cases.

Your wife's hairdo and manicure are cheap, if she can pay them out of your hundy after tax and gst, and still have change left over!

15 bucks a cut and an emery board I gave her for Christmas...

I am the original Scrooge, with Grinch tendencies.

Here is a little Heart Warming free gift for Christmas.

No Friday Funny this week. Let us get into the Christmas Spirit.

(No not the Scotch, put that bottle down, click on the below link).

This from USA. Warning, it has heart warming tendencies, heretics need not comply.


"With inflation expected to increase steadily, consistent with the inflation target, a much sharper adjustment in interest rates than projected risks being inconsistent with clause 4b of the PTA, and could not change near-term inflation outcomes," the bank said in its full Monetary Policy Statement.

What am i missing? For the fourth consecutive month, China’s PPI was published as -5.9%.

Perceptions of exported deflation hitting New Zealand's shores beyond the 5 year plus forecast horizon are written in stone as long as term fixed IR swap yields continue the inexorable trend to negative against NZ government debt yields.

....this is “forward guidance” that led Bernanke’s view on QE, because if QE worked as it was proclaimed then investors would demand higher interest rates at the start (rather than the lower interest rates QE was supposed to create) in anticipation of expectations of lower interest rates producing the full economic recovery and thus the benefit of higher future interest rates. In both cases here, QE and oil prices, the “stimulus” never arrived and it isn’t hard to see why monetary policy and orthodox economics can’t maintain a grip on economic function. Rational expectations theory has so corrupted the discipline as to convince it that what wasn’t happening will undoubtedly because what is will not. Read more


It's the only cost they can control thats acceptable to the masses in debt, without some form of political suicidal austerity.
With so much debt it's an attempt to keep the economy alive, it's now become the equivalent of 'life support' throughout the west, who has the courage to turn off the machine?
Meanwhile our internals are being slowly hollowed out until we become an empty lifeless shell.

I concur Stephen. Despite larger forces at play, there's still the expectation of US growth superceding everything else going on globally and Janet will rescue our currency and disinflation woes by exporting swathes if inflation our way.

The commercial banks win ? Again ?

How ?

Won't cut again?

who knows? The big bad wolf China is aching and finding hard to move around and our nearest cousin across the ditch is running out of money.. expect him to crash our party soon.

well somebody has already seen home owners will have more money to spend, good old len

Great strategy - keep rewarding debt and discourage saving.

it might be a good strategy if the rewarded debt was productive debt - but the banks have been further encouraged to lend even more to property investors - at the direct expense of anyone trying to save with banks.

Savings should be put to good use and not simply "banked" ie there is no way you should expect a high rate of return.

so are suggesting just spend up don't save?

no, invest in productive companies.....

and how does an oldie do that without being ripped off by a FA.
the thing is you need places for them to put there money for an ok return that they FEEL is save.
they do not understand banks also contain risk

Perhaps more importantly, I am also puzzled about the Bank’s stance on immigration, and the evidence base that lies behind it. The Governor is clearly at one with New Zealand elite opinion – he told the news conference that he thought high levels of immigration were “a good thing for New Zealand” and that he did not think there should be any immigration policy changes. Views differ on the long-term economic impact of immigration, and many certainly agree with him, but why was this a subject the Governor is commenting on at all? Historically, the Reserve Bank has been studiedly neutral on the long-term issue, and focused (rightly) on the short-term cyclical implications. Governors who use the platform they have been given to advocate their personal policy preferences in other areas risk further undermining support for the autonomy they enjoy in respect of monetary policy.

A lot of fortunes depend on those views.

Ha, rolling around on the floor laughing my fucking head off. Look up the definition of insanity and you'll see a picture of an economist sitting with his economic text book, playing with the OCR up/down lever and spouting economic dogma. Sitting around him, entranced, are all the blind sheople, happy that someone else is making all the decisions so they don't have to think for themselves.

At what point do y'all begin to apply common sense, wisdom and even a little logic and start to question the validity of economic growth, economic theory and wealth measured in money and possessions?

"meh" this cuts to the quick!! Having trained to be an economist, then a weather forecaster and being declined, I just have to realise that my home country is a mark on the end of the globe. Maybe we just have to realise that NZ has about half the population of London. (contains some fiction)

I hear ya. I'm over being subtle. I "trained" to be an accountant and spent 20 years being an "expert". Now training to be a hippie mystic and see the bigger, longer term picture as well as the smaller real picture. Reckon I can't be declined that.

immigration and foreign sales are being used as economic shock absorbers, allowing us to run the economy closer to the rev limiter reducing the risk of crashing.