RBNZ holds OCR at 2.5% as expected; says “some further easing may be required” as headline inflation track is now lower than forecast in Dec; says Auckland still a financial stability risk

RBNZ holds OCR at 2.5% as expected; says “some further easing may be required” as headline inflation track is now lower than forecast in Dec; says Auckland still a financial stability risk
Reserve Bank Governor Graeme Wheeler at an earlier Monetary Policy Statement news conference.

By Bernard Hickey

Financial markets are now expecting the Reserve Bank to cut interest rates again as soon as March after the bank delivered a clear easing bias in its first decision of the year and Fonterra surprised markets with an earlier-than-expected cut in its forecast payout to NZ$4.15/kg.

The Reserve Bank held the Official Cash Rate (OCR) at 2.5% as universally expected, but the focus was on its comments about the future and it delivered the clear easing bias for the rest of 2016 that most economists had expected.

Governor Graeme Wheeler said uncertainty about the global economy had increased because of concerns about China and other emerging markets. He also noted that headline inflation would now take longer to reach the Reserve Bank’s 1-3% target range than the Reserve Bank had forecast in its full December Monetary Policy Statement (MPS) forecasts.

“Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range,” Wheeler said in an eight paragraph statement with the bank’s first OCR decision of the year.

These comments represented a much clearer easing bias than the Governor’s comments on December 10, when he said of the bank achieving the middle of its 1-3% target range: “We expect to achieve this (target) at current interest rate settings, although the Bank will reduce rates if circumstances warrant.”

"The signal that the RBNZ may reduce the OCR was more forthright than markets anticipated," Westpac Chief Economist Dominick Stephens said.

The New Zealand dollar fell almost a full 1 USc to 64.2 US after the statement, although it also may reflect a cut in Fonterra's payout forecast to NZ$4.15/kg from NZ$4.60/kg. The jury is out on whether the next cut will be in March or June, with financial markets pricing in a 50% chance the rate cuts will restart in March. Wholesale 'swap' interest rates, which are the basis for fixed mortgage rates, fell 5 basis points after the decision.

Elsewhere, Wheeler said economic growth in New Zealand was expected to increase in 2016 because of continued strong net migration, tourism spending, solid construction activity and a lift in business and consumer confidence.

However, he said house price inflation in Auckland remained a financial stability risk and he repeated that the New Zealand dollar was still too high.

“There are signs that the rate of increase (in Auckland) may be moderating, but it is too early to tell. House price pressures have been building in some other regions,” Wheeler said.

The mention of other regions was the first time the Governor has mentioned the spreading of house price inflation into other regions in his initial set-piece statement, suggesting the bank is becoming more concerned about the double-digit inflation now spreading into the likes of the Waikato and Bay of Plenty. Some economists have warned the Reserve Bank may widen its lending restrictions for landlords if it became concerned about inflation elsewhere.

Wheeler said there had been some easing of financial conditions in New Zealand in recent weeks with a fall in the New Zealand dollar and market interest rates.

“A further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices,” Wheeler said.

He said headline CPI inflation remained low due to falling fuel prices, but the Governor noted core inflation and inflation expectations were not falling.

“However, annual core inflation, which excludes temporary price movements, is consistent with the target range at 1.6 percent. Inflation expectations remain stable,” he said.

Financial markets have increased their expectations of further OCR rates as soon as March, with some economists predicting the Reserve Bank will have to cut the OCR to 2.0% by the middle of the year.

The Reserve Bank’s statement ‘in between’ full Monetary Policy Statements does not include fresh forecasts for inflation or interest rates so it’s not clear how the Reserve Bank’s own expectations have changed. It forecast the OCR would be flat at 2.5% until 2018 in its December 20 statement, although its comments today about “some further easing may be required” and its note about its headline inflation expectations falling since December suggest its own OCR rate forecasts have fallen.

The next full set of forecasts are not due until March, although Wheeler is expected to flesh out the bank’s views in a luncheon speech next Wednesday.

Economist reaction

ASB Chief Economist Nick Tuffley said the Reseve Bank delivered a clearer easing bias, "but not an explicit signal that the RBNZ will necessarily cut the OCR as soon as March."

"But, importantly, the RBNZ is very conscious of the growing downside risk to the inflation environment," Tuffley said, adding he expected the Reserve Bank to cut the OCR to 2.0%, starting from June.

"The risks to that forecast remain a slightly earlier start," he said.

"The threshold for a March OCR cut still appears high in the wake of the January statement, The RBNZ still seems too relaxed about the inflation risks, but events could yet prompt a move then.  The April OCR window follows the Q1 CPI, and further signs of weak inflation pressure could be a green light at that point," he said.

Westpac Chief Economist Dominick Stephens said the Reserve Bank had shifted to an explicit easing bias, but was not explicit about the likely start date for further cuts. Stephens said the statement could support cuts starting in either March or June. He now expected the rate cuts to resume in March, whereas he had previously thought they would start in June.

Westpac now expected annual inflation to fall to 0% by September of this year.

"As an inflation targeting central bank, there was no way the RBNZ could ignore such a monumental change in the inflation outlook," Stephens said.

ANZ Chief Economist Cameron Bagrie said the statement delivered a more explicit easing bias than the conditional one delivered in December, although it was not one way traffic. He pointed to the bank's comments about solid growth, house price inflation risks and a lower New Zealand dollar.

"This doesn’t sound like a central bank ready to cut rates any time soon. But the door is open, and markets will run with it," Bagrie said.

"While the easing bias has been “stepped up”, the Bank stopped short of setting the scene for a March cut, so it is difficult to argue with markets when odds of a March cut sit at around 50/50," he said.

BNZ Head of Research Stephen Toplis stuck to his view that the Reserve Bank was more likely to remain on hold than cut, "but given the stated easing bias and the obvious risks that prevail it is easy to justify current market pricing and betting against it is unlikely to offer great reward in the very near future."

"The Bank spent some time highlighting why rates should not be cut now. In particular, this was the first time (that we can remember) that the RBNZ has specifically referred to core inflation in its OCR/MPS press statements," Toplis said, pointing also to the bank's statement about stable inflation expectations.

"The combination of these statements is a very strong warning to all and sundry that the RBNZ will not pander to pressure to lower its cash rate just because headline inflation remains low," he said.

"Equally, it is a reminder that if headline inflation stays low and reduces inflation expectations to the extent that economic behaviours threaten to push the core rate down further then the RBNZ will respond to this by cutting rates," he said.

"Given that the RBNZ is looking for weakening inflation expectations to feed into core inflation as a catalyst for further easing then it would seem that any prospective rate cut, were it to happen, is more likely to occur later in the year than sooner given the lags involved."

First NZ Economist Chris Green changed his OCR view after the decision, which he described as adopting a more explicit easing bias. He said he now saw one or two 25 basis point cuts over 2016, rather than the OCR remaining on hold. He said the March 10 MPS may be too early, given a lack of fresh domestic data, and he had pencilled in one cut for the June MPS.

Political reaction

New Zealand First Leader Winston Peters said the Fonterra payout cut threatened an economic storm.

“The Prime Minister’s answer is consumptive policies in Auckland and an abandonment of productive polices for the rest of the country," Peters said.

“Our government has done less than nothing to help provincial NZ which is the foundation of our export wealth.  Historically this must be the worst National government for New Zealand farmers and with the chickens coming home to roost, they’re paying the price for what is now a party dominated by city slickers," he said.

Labour Finance Spokesman Grant Robertson called on the Government to take action on the economy.

"The drop comes a day after Fitch ratings agency revised our near term growth prospects downward because of declining prices for dairy exports and on the same day the Reserve Bank said dairy prices remain a risk," Robertson said.

“The Reserve Bank Governor can’t fix the economy on his own. He’s stuck between the rock of low inflation and falling growth and the hard place of the Auckland housing market," he said.

“New Zealand needs a more diversified economy to help insulate us from major commodity shocks. We need to invest in job-rich industries and support companies to move up the value chain. We can also bring forward projects to stimulate the economy. Despite more than a year of warnings as dairy prices have plummeted there has been no real effort from the Government to do this."

Green Finance Spokeswoman Julie-Anne Genter said the Reserve Bank would have been able to the cut the OCR without its concerns about the Auckland housing market, which the Government was not doing enough to address.

“National hasn’t done enough to take the heat out of the Auckland housing market and John Key’s big speech yesterday showed that National has no new ideas for how to fix the housing crisis," Genter said.

"We need Government-backed affordable housing developments, quality intensification along key transport routes, and a capital gains tax (excluding the family home),” she said.

Here is the Reserve Bank’s full statement today:

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

Uncertainty about the strength of the global economy has increased due to weaker growth in the developing world and concerns about China and other emerging markets. Prices for a range of commodities, particularly oil, remain weak. Financial market volatility has increased, and global inflation remains low.

The domestic economy softened during the first half of 2015 driven by the lower terms of trade. However, growth is expected to increase in 2016 as a result of continued strong net immigration, tourism, a solid pipeline of construction activity, and the lift in business and consumer confidence.

In recent weeks there has been some easing in financial conditions, as the New Zealand dollar exchange rate and market interest rates have declined. A further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices.

House price inflation in Auckland remains a financial stability risk. There are signs that the rate of increase may be moderating, but it is too early to tell. House price pressures have been building in some other regions.

There are many risks around the outlook. These relate to the prospects for global growth, particularly around China, global financial market conditions, dairy prices, net immigration, and pressures in the housing market.

Headline CPI inflation remains low, mainly due to falling fuel prices. However, annual core inflation, which excludes temporary price movements, is consistent with the target range at 1.6 percent. Inflation expectations remain stable.

Headline inflation is expected to increase over 2016, but take longer to reach the target range than previously expected. Monetary policy will continue to be accommodative. Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data.

For comparison’s sake, here is the Bank’s statement from December 10.

The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 2.5 percent.

Globally, economic growth is below average and inflation is low, despite highly stimulatory monetary conditions. Financial markets remain concerned about weaker growth in emerging economies, particularly in China. Markets are also focused on the expected tightening of policy in the United States and the prospect of an increasing divergence between monetary policies in the major economies.

Growth in the New Zealand economy has softened over 2015, due mainly to lower terms of trade. Combined with increases in the labour supply from strong net immigration, the slowdown has seen an increase in spare capacity and unemployment.

A recovery in export prices, the recent lift in confidence, and increasing domestic demand from the rising population are expected to see growth strengthen over the coming year. The New Zealand dollar has risen since August, partly reversing the depreciation that occurred from April. The rise in the exchange rate is unhelpful and further depreciation would be appropriate in order to support sustainable growth. House price inflation in Auckland remains 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. CPI inflation is below the 1 to 3 percent target range, mainly due to the earlier strength in the New Zealand dollar and the 65 percent 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. There are a number of uncertainties and risks to this outlook. In the primary sector, there are risks that dairy prices remain weak for longer, and the current El Nino results in drought conditions and weaker output.

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

We expect to achieve this at current interest rate settings, although the Bank will reduce rates if circumstances warrant. We will continue to watch closely the emerging flow of economic data.

(Updated with full statements, details, market reaction, political reaction)

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He should have cut but guess he will have plenty of room now to slash 1% off the OCR over the next 18 months as the next GFC kicks in. Looks like the FED will have to drop back to zero too.

He should let Aucklanders blow themselves up and drop the rate - this will fix the inflation and exchange rate issues.

Smart thinking....just curious though, when Aucklanders start to default on their loans, will that affect/impact just Aucklanders or the whole nation?

Oh yes!! Because Awk is the "most important place" , nationally we contribute to their rail, tarseal and tunnels, so I don't think they will be shy about having us contribute to their housing debacle. May even happen by way of the OBR.!

You do know Aucklanders pay tax too, right? Maybe its actually the tax paid by Aucklanders that is paying for the Auckland's rail, tarmac and tunnels.
Do you have a breakdown of the amount of tax paid per region? I wouldn't mind seeing that...

No I don't...my bad. :( But would like to find out. Anyone help there? I also paid tax when I lived in Awk for 25yrs. $8670m nat tax take, $4154m from Akl. From what I can see. Surprise myself !!

AKL has a lot of service sector jobs.

Sounds about right. But where did you get this info?

Google !! Tax paid per region nz ?

Yup did that. Spent an hour searching last night. Crickets.

Only found a project for Auckland site that said Auckland supplied 60% corporate tax and 53% GST to national total. No source given though.

I doubt they can tie company tax back to location of production. More likely it's just the head office in Auckland (e.g. Fonterra)

It was on IRD site. Big spreadsheet. Can't find it now, but as you say, it's probably skewed by head office/profit centre returns.

regarding tarmac, Auckland gets fair share these days, after decades of missing out. Waikato, Wellington, and West Coast get far more than their share. Northland also gets its fair share, but everyone else misses out.


Auckland actually is a net contributor to other regions infrastructure, its all the petrol exercise taxes, a great portion of which gets paid in AKL.

A drop in the ocean compared to all the costs Auckland-favoured policies place burdens on the rest of us.

Aucklanders knew they were overpaying in the belief that capital gains gravy train would be unending. There are twice as many people and twice the GDP outside of Auckland. Will the Aucklanders support them?

PS I am an Aucklander

Lower rates and continued rising prices in auckland together with dairy price reductions and china slow down would see NZ become very high risk, rating agencies would see this, international debt would become more expensive, and even with OCR reductions cost of foreign debt would be very high meaning high mortgage rates - all happening with slower domestic spending and rising unemployment.

The macro moves on auckland property were very smart moves, hopefully it will come off the boil gradually and rates can be lowered without further inflating the auckland market and putting the whole country at risk

He did the right thing to hold.
He has time on his side and to cut now would have risk further inflating AKL house prices just as they were moderating/flattening.

What they say, ain't always what they mean.. RBNZ...Fund Managers....Real Estate Agents...Mortgage Broke-errs...All want.."Potential Victims'...


A litte vigorish dependent soothsayers, one and all. A little bias is all they need.

A little optimism goes a long, long way. Double speak is their market soother.

Potentially...Have I got a deal for you?.


“Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range,” Wheeler said in an eight paragraph statement with the bank’s first OCR decision of the year.

It's beyond time for central bank governors and their foreign counterparts to claim their actions will inhibit the collapse of global pricing structures in respect of key commodities, as an example, and the consequent impact upon redefined measures of inflation such as CPI.

As far back as year ago the ECB was forcefully engaging with the financial market place to raise inflation towards 2.0% without success. And yet again they were forced to repeat the veracity of the failed intention only last week.

The ECB announcement from January 22, 2015, leaves no doubt:

The Governing Council took this decision in a situation in which most indicators of actual and expected inflation in the euro area had drifted towards their historical lows. As potential second-round effects on wage and price-setting threatened to adversely affect medium-term price developments, this situation required a forceful monetary policy response.

Asset purchases provide monetary stimulus to the economy in a context where key ECB interest rates are at their lower bound. They further ease monetary and financial conditions, making access to finance cheaper for firms and households. This tends to support investment and consumption, and ultimately contributes to a return of inflation rates towards 2%. [emphasis added] Read more

The Federal Reserve Board hopes rely on what is considered transitory matters causing inflation to fall, when in fact they remain permanent and call for a fix rather than excuses attended by a failed 'wait and see' approach.

Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. Read more

Could get hard to find willing 'investors' as that is what OBR has made depositors, to keep funding losses in NZ farm and housing markets.
It gets to a point where just getting your money back is a relief and I for one am not going there.

I have steered clear of keeping money in NZ banks for that reason.

seems like the whole country is investing in housing whether directly or indirectly
is this the governments only growth agenda

In anybody's opinion, are there any NZ banks that are safer for depositors than the other banks in terms of an OBR? Is Kiwibank a good choice? I am concerned and want to protect my small deposit

FYI, a reminder that we have a 'how the OBR might work if implemented' story here https://www.interest.co.nz/bonds/64411/if-bank-failed-and-open-bank-resolution-policy-was-implemented-how-would-it-affect-bank

short answer would be no; but if you have<$10000 not much of a worry, 100K+ should split between banks, and consider opening 2 accounts at the same bank, one for you and one for your significant other; the thing being to reduce the size of each individual account.
Don't know how trusts with accounts would be treated.
Don't know if they would steal all your money above a certain amount(to give CEO's bonuses) or just a percentage.
NZ's OBR is opaque, a mess, and it is a real outlier policy internationally.


The RBNZ has introduced potential NZ financial instability by the unique OBR.

In Australia (with $250,000 deposit guarantee per person per bank) the RBA has a much more prudent approach.... they say.....

"In the absence of depositor confidence, there is a heightened risk of deposit runs and contagion to other institutions given the limited scope for most depositors to differentiate between safe and unsafe banks. Confidence in the banking system is therefore important for financial system stability and, to this end, governments and regulatory authorities put in place various legal and regulatory arrangements to
support confidence among bank creditors that their funds are secure."

and also "First, deposits are a critical part of the financial system because they facilitate economic transactions in a way that wholesale debt does not. Second, they are a primary form of saving for many individuals, losses on which may result in significant adversity for depositors who are unable to protect against this risk. These two characteristics also mean that deposits are typically the main source
of funding for banks, especially for smaller institutions with limited access to wholesale funding markets. Third, non-deposit creditors are generally better placed than most depositors to assess and manage risk. Providing equivalent protection arrangements for non-deposit creditors would weaken market discipline and increase moral hazard."

In NZ, the RBNZ has undermined savers confidence by holding them responsible for potential bank failure.

Probably not, split deposits between partners and banks if you are sleepless over it, open multiple accounts at different banks.
See http://www.interest.co.nz/saving/bank-leverage , the NZ banks have high leverage and therfore higher profits and most likely higher risk; I think mostly they are all largely tied up with real estate, so vulnerable to a crash which would inevvitably affect this sector hard.

JK has been successful in calling for investors to consider the regions. Clearly out of touch with ordinary Kiwis - common pollie affliction.

Drop the rate but increase the LVR for all mortgage lending. FHB's will complain but this isnt the right time for them to buy anyways, it's ridiculous that an 100k/pa household can purchase a 800k home just because they have a deposit (gifted in most cases). Insane.
An investors need less incentives.....low yield + higher deposits + no tax advantages would be great:)

replace the LVR with I to L ratios for owner occupiers as for investors yes increase the LVR and take away the Tax advantage

Wheeler is following the footsteps of other central *ankers - too little too late - ECB /too much too sonn - FED. As others have said to fix the housing bubble reduce loan to income back to say 3.5-4 times income with investment property 50% LVR.

Does TPP involve dovetailing our monetary policy with the US's ?


Sounds about right. where did you get the info?

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