RBNZ holds OCR at 2.25%; says further easing may be required; notes revival of house price inflation in Auckland; wants lower currency; but NZ$ jumps almost 1 USc to 69.2 USc after decision

By Bernard Hickey

The Reserve Bank held the Official Cash Rate at 2.25% as broadly expected, but indicated it may lower it again later this year.

However, it warned yet again that it wanted to see a lower New Zealand dollar and it said there were some indications house price inflation in Auckland was picking up.

Only three (BNZ, Kiwibank, AMP) out of 17 economists had expected a cut today, with most expecting the bank to wait until its full June 9 Monetary Policy Statement, which will include fresh forecasts, before cutting to 2.0%. Most economists expect one further cut to 1.75% later this year, although the Reserve Bank itself has only forecast one more cut to 2.0% and today's statement appeared to push back against those expecting a second cut.

Financial market expectations for a cut today were higher than for economists, which meant the decision not to cut triggered a sharp rise in the currency towards 10 month highs in morning trade. Economists also noted the language in the statement was less 'dovish' than expected, which saw two year wholesale interest rates rise 7 basis points to 2.26%.

Financial markets had increased their expectations for a cut to almost 50% from closer to 30% over the last day after much weaker than expected Australian inflation data. The New Zealand dollar rose over 1 Australian cent to a two-month high of 91 Australian cents after the decision, having risen a full cent on Wednesday. Both rises will push the Trade Weighted Index further up beyond the Reserve Bank's 70.9 forecast for the current June quarter. It had averaged 72.7 or 2.5% above that forecast in the June quarter up until yesterday, which will add to deflationary pressures in the non-tradable part of the economy.

"Today's statement suggests that the RBNZ is planning to call time on the easing cycle in the June MPS," Westpac Senior Economist Michael Gordon said.

Governor Graeme Wheeler did not give a specific reason for not cutting, but did point to a heating up of housing inflation.

"House prices remain at very high levels and additional housing supply is needed. Housing market pressures are building in some other regions," Wheeler said in the nine paragraph statement with the decision.

Wheeler referred to uncertainties globally and locally, including "weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration, and pressures in the housing market."

He said the outlook for global growth had deteriorated over recent months due to weaker growth in China and other emerging markets, although prices for some commodities had picked up, but remained weak.

"Monetary conditions are extremely accommodative internationally, with considerable quantitative easing and negative policy rates in some countries. Financial market volatility has eased in recent weeks, but markets continue to watch closely the policy settings of major central banks," he said.

"Domestically, the economy is being supported by strong inward migration, construction activity, tourism, and accommodative monetary policy. Dairy export prices have improved slightly, but are below break-even levels for most farmers.

Exchange rate warning

Wheeler again commented that he would like to see the currency lower.

"The exchange rate remains higher than appropriate given New Zealand’s low commodity export prices. A lower New Zealand dollar is desirable to boost tradables inflation and assist the tradables sector," he said.

The New Zealand dollar jumped almost a full cent to 69.2 USc in the first 10 minutes of trade after the decision.

'Falling short term inflation expectations'

Wheeler said annual core inflation remained within the 1-3% target range and long-term inflation expectations were "well-anchored" at 2%, although he noted there had been a material fall in shorter term inflation expectations.

"We expect inflation to strengthen as the effects of low oil prices drop out and as capacity pressures gradually build," he said.

"Monetary policy will continue to be accommodative. Further policy easing may be required 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."

Economist reaction

Westpac's Gordon said the Reserve Bank retained its March comment that "further policy easing may be required".

"We had expected this to be strengthened to something like "further policy easing is likely", wording that the RBNZ has frequently used throughout this easing cycle to signal impending rate cuts," Gordon said.

"We had expected a stronger easing bias from today's statement, based on two factors in particular: the NZ dollar is tracking about 3% higher than the RBNZ's last projection, and higher bank funding costs meant that the March OCR cut wasn't fully passed through into mortgage rates. But the language on the NZD in today's statement was no firmer than it was in March, and mortgage rates were conspicuous by their absence," he said.

"On balance, we still expect another 25bp OCR cut in June - indeed, the market's response actually increases the pressure on the RBNZ to do so. But today's statement suggests that the RBNZ is planning to call time on the easing cycle in the June MPS."

ANZ Chief Economist Cameron Bagrie said a clear easing bias had been maintained, as he had expected.

"At the margin, the tone of the statement was a touch less dovish than in March, although to be fair it was difficult for it not to be," Bagrie said, adding the statement had something for everyone.

"The door to a June OCR cut remains open, and that remains our forecast for now. But we see this as very much a line-ball call (we see the odds of a cut at about 60%)," he said.

"Yes, reasons for cutting exist (dairy, NZD strength amidst currency games from other central banks, low inflation expectations, funding cost pressures, and the likely return of global financial market turbulence). But when weighed against a domestic economy that is still operating near trend, evidence that core inflation is stabilising and capacity pressures intensifying, re-leveraging behaviour evident and housing markets booming, we remain of the view that additional easing may not be in the best interests of the economy."

ASB Chief Economist Nick Tuffley said he still expected the Reserve Bank to cut in June, in line with the central bank's own forecasts.

"The statement, however, gives little added urgency relative to that of March’s, and no hint that the RBNZ is currently anticipating a need for the OCR to drop below the 2% level the RBNZ’s forecasts currently imply.  Nonetheless, we still see downside risks to the inflation outlook and expect the RBNZ will cut the OCR to 1.75% by August," Tuffley said.

"It is increasingly apparent that the housing market was gathering momentum around the country even before the March OCR cut.  Further OCR cuts will give the market even more of a boost and bring the RBNZ’s financial stability mandate into more conflict with the price stability goal," he said.

"It is increasingly likely that, if the RBNZ cuts the OCR further, it also expands its current lending restrictions.  However, as the past few years have shown, these restrictions only have a temporary effect when demand and supply are fundamentally out of balance."

BNZ Economist Craig Ebert, who had forecast a cut today, said he was glad the Reserve Bank had not cut and had issued a less dovish commentary than in March.

"This represents yet another inter-meeting shift of tone and emphasis from the RBNZ, which continues to frustrate us," Ebert said.

"That being said, we are pleased with the way the Bank pushed back a bit today, with, ultimately, a more balanced view on the challenges it faces," he said.

Political reaction

Labour Finance Spokesman Grant Robertson said Government complacency had left the Reserve Bank with little room to move.

“Graeme Wheeler has made it clear he has concerns over the international economy, increasing house prices in Auckland and other regions, and low milk prices. But with no action from the Government on any of these issues the Reserve Bank has few options but to stick with the status quo," Robertson said.

“Bill English’s complacency has put the economy in a holding pattern. Inflation is non-existent, the exchange rate is stubbornly high and growth per person has been described by economists as ‘sluggish’. On the other hand house prices are skyrocketing again and the Governor has warned the housing boom is spreading from Auckland to other regions. Unaffordable housing will be a blow to regions trying to encourage business and workers to move there," he said.

“Mr Wheeler can’t do it all on his own. The Government needs to take action on multiple fronts – that will make it easier for the Reserve Bank to do its job. There must be action to diversify the economy away from reliance on dairy and substantive policies to rein in the housing market."

Green Finance Spokeswoman Julie Anne Genter said the Government’s failure to fix Auckland’s housing market had forced the Reserve Bank to hold the OCR, which was hurting exporters and jobs.

“The Bank clearly blamed runaway Auckland house prices and the lack of adequate housing supply as one of the key reasons for its decision to keep the OCR unchanged today.National needs to introduce strong measures that will contain house price inflation in Auckland instead of leaving it all up to the Reserve Bank to manage with one tool — interest rates," Genter asid.

 “Higher interest rates are keeping the New Zealand dollar higher, suppressing exports and contributing to the largest annual trade deficit since April 2009," she said.

“The responsible policy from Government would be a comprehensive capital gains tax (excluding the family home) to remove the unfair tax incentive to invest in property. A ban of foreign buyers would also help reduce excess demand for Auckland houses.If the Government is serious about dealing with Auckland supply constraints, it should be building more homes, especially affordable homes to help first home buyers rather than property investors."

(Updated with more market and economist reaction, and chart)

Official cash rates

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38 Comments

Sitting on his hands again. I thought he had been told to get on with the job. A rising dollar is not going to help get inflation back into the middle of the 1-3% band.

Could always just redefine inflation to something more realistic.

Yeah, maybe they could include property prices accurately in the CPI calculation. Whoops, silly me. Of course we can't do that.

As the OCR drops, I pay less per month, so that is deflationary.

and also those that receive income getting less to spend in the economy, so prices need to drop to attract a sale

Foreign wholesale lender's interest rates are hardly likely to fall, given NZ cannot pay it's way without their support, so why should domestic savers be chosen to subsidise kitchen ATM funded import splurges - the credit risks are just the same? Moreover, they have chosen to defer consumption for the greater good - right?

New Zealand has recorded its biggest annual trade deficit since April 2009, reflecting weaker prices of agricultural commodities such as dairy products, beef and lamb, and increased imports of vehicles and machinery. Read more

I can understand that RBNZ will not want to reduce the rate without implementing further restrictions on residential lending. However saying he expects a lower NZD is idiotic, RBNZ and the Government need to do something to reduce it without risking the rest of the economy.

The NZ Herald is publishing wishful thinking by Fonterra. The excess milk powder isn't going to magically disappear unless demand for processed products falls.

Wheeler does appear to be a stand up comedian claiming that inflation is within the target range and fixed on 2%. Unless the CPI is adjusted to reflect that it's not the case, the RBNZ site states inflation is 0.4. Imported deflation is accelerating so when inflation hits 0-0.1% again we'll be in for another cut.

Perhaps some bedtime reading on the Fisher Effect and expectation based monetary economics might explain the 'idiotic lower NZD' expectation you mention..

Also, he states that 'core' inflation is within the target range - a completely separate long run measure to quarterly CPI.
Additionally, he states that long term inflation expectations are well anchored at 2%. Even a rudimentary analysis of nominal vs actual interest rates tends to support this.
Inflation targeting is based primarily on anchoring medium to long term expectations. If the data is suggesting that this is the indeed the case, he is logically and ethically bound to follow this.

Wheeler is no rogue Central Banker as some of you people believe him to be. The biggest issue he has to deal with - the true fact that he is being made to look like the problem - at current is the lack of support/conducive policy from the Government.

Wheeler is no rogue Central Banker as some of you people believe him to be. The biggest issue he has to deal with - the true fact that he is being made to look like the problem - at current is the lack of support/conducive policy from the Government.

The integrity of the position demands the governor claim thus in public.

Hooray for sanity!

Actually I've ignored the Government as our Finance Minister is a simpleton.

Wheeler will have some magic model with inputs that are guesses. The medium and long term modelling is only as good as the inputs that are provided. Those inputs seem increasingly detached from reality.

Is he a rogue central banker? No. Is he adapting to the current climate? Partially. There is a difference between his statements and his actions (for good reason). Making statements about the NZD instead of taking action is ineffective, currency traders don't care about words at this time.

Importing more deflation is not going to create inflation here.

Totally agree, except "simpleton" is too kind a word.

Report highlights the need to introduce the new Land Tax as soon as possible. We have a two tier economy and we need to help the true industry we have and not the one driven by speculative money.

Well if you want a lower NZ$, lower the OCR, simple. Housing is a separate matter, let it be

Okay we can carry on spending like drunken sailors ............ until the next crisis.

I can't help my spending. I've had to replace my bed and they sell new beds for 40% of RRP at the moment. Even with the NZD at 0.70 everything is still getting cheaper.

40% off RRP is an illusion as are comments that inflation is coming.

The Governor has been predicting inflation for several years now, but the reality has been deflation or near zero inflation. 2 more quarters then things will return to the old normal is the mantra.

40% of RRP (60% off). Given that they list RRP and then their offer price that is 60% of RRP. They have a lot of room to move down because the imported goods they use to make the matresses are very cheap.

Wheeler is in an illusionary world unrelated to the one we live in.

Short term fixed mortgage rates still may dip under 4% despite no OCR cut.
Just don't fix for too long.

More of the same. Rudderless 'lifeboat' NZ, taking on more passengers, sinking slowly and drifting slowly towards the rocks.

Batting Zero Wheeler!

If Wheeler cannot do his job then he needs to resign or be dismissed from his position!!
He has completely failed in his capacity as RBNZ Governor, and what is going on with the RBNZ Board? When we have numerous people going past "go" every week collecting a salary package and failing to do their job then we must demand their resignations immediately!

This is a typical case of a bureaucracy functioning at well below par and causing a trail of destruction in their wake. Wheeler is so blind and ignorant that he cannot even see the damage that his previous OCR raises did and that these are still filtering through.

It is quite clear that Wheeler is propping up house prices and the banks and to hell with the wider export economy, trade balance etc! The actions of the RBNZ are shambolic, tomfoolery and the problems they have are all of their own making. Wheeler seems to want a stagnant sinking hole of an economy with most profits either heading to Banks or the Government and stuff all else left for the average NZer. All this playing games longing and shorting the dollar raising and lowering the OCR, creating inflation in some assets while ensuring others deflate ensures that those not in the world of derivatives trading get the rough end of the stick and yet it is this part of the population that keeps the whole shoddy system going for what I can only call the elite bureaucrats of NZ!!

If Wheeler wants financial stability then surely he knows that the prosperity of NZ'ers is the way in which long-term financial stability is obtained.......Under Wheeler's watch NZ has more people renting houses than ever before........does he not understand what has happened in Europe?!?!

Why blame Wheeler? It is we the people through our own ignorance that have allowed the banking/debt/money system to become what it is. We are the ones demanding overpriced, oversized houses and borrowing the "money" to purchase them so we can be "wealthy". We the people are demanding cheap imported trinkets and gadgets. We have accepted economic theory and growth as gospel. We have allowed wealth and power to accumulate in the hands of the few and our lives to be ruled by institutions and corporations. We only have ourselves to blame.

Well said, though its a particular subset of quasi-economics.

This is also true and even more reason to let it topple to "reeducate" the deluded masses. The sad reality Meh is most have no idea how the monetary and banking systems work. Not taught in school from an early age yet one of the most essential life lessons surely?

Nailed it

Higher House prices will lead to lower inflation as householders will have less income to spend on discretionary spending.

except those borrowing more on the house to spend. apart from them i agree with you Housing expenses are rising faster than inflation

There a whiners and losers.

Those with vested interests to have the OCR fall. ..marginally.

And those with vested interests to have the OCR fail.figuratively

And the I's have it.

"notes revival of house price inflation in Auckland; wants lower currency; "
This guy is sharp - not. You didn't have to be Einstein to know the currency would move higher with this type of OCR decision.

Well, bugger the currency.

Why can't we just stop buying into this mercantilist BS where every country hammers their rates to zero in an attempt to devalue vs everyone else? It should be patently obvious that it is not a viable or sustainable method of economic management/wealth creation, it just means a race to the bottom for all countries, with nothing gained in the long run. Meanwhile massive distortions are introduced, which the linear-thinking bureaucrats just can't acknowledge or understand.

The Governor should be firmly focused on our twin bubbles (the housing market, and arguably an emergent stock market bubble), rather than pandering to the politically powerful farmer's lobby.

Wheeler is continuing the long tradition of the central bank - too little too late & too much too soon.

Hahaha 40% off, what a deal. Sucker.

If you don't get 60%+ off you're paying too much.

Im sick of Wheeler saying he "wants a lower currency" then doing absolutely nothing about it. He has the tools! I think he should be replaced.

Too right OB. They just aren't addressing the issues fast enough. People over here are getting fed up with it.

The pair of you sound like children who aren't getting what they want. Why are you so desperate for lower interest rates.