RBNZ cuts OCR by 25 bps to 2.0% and forecasts just one more cut; NZ$ sprints over 73 USc after markets had forecast chance of 50 bps cut

RBNZ cuts OCR by 25 bps to 2.0% and forecasts just one more cut; NZ$ sprints over 73 USc after markets had forecast chance of 50 bps cut

By Bernard Hickey

The Reserve Bank of New Zealand has cut the Official Cash Rate by 25 basis points to a record-low 2.0% as all economists had expected, but it forecast only one more 25 basis point cut by the middle of next year.

It included scenarios that could include more cuts, but financial markets were disappointed and the currency surged, raising questions about whether the Reserve Bank is sticking to its inflation targeting mandate.

The Reserve Bank forecast in its Monetary Policy Statement that it did not expect CPI inflation to reach the 2% mid-point specified in the Policy Targets Agreement with the Government until the September quarter of 2018, which would imply a sub-target inflation rate for almost seven years. The Bank forecast CPI inflation, which was 0.4% in the June quarter, would not reach the bottom of the bank's 1-3% target range until the December quarter of this year, implying a sub-target-range inflation rate for at least 8 quarters or two years.

Currency markets had priced in a 20% chance of a 50 basis point cut and some economists had expected the Reserve Bank would forecast at least two more cuts as it grapples to get inflation back near the 2% mid-point after more than four years of being under the Reserve Bank's main target.

The New Zealand dollar sprinted almost a cent higher to just over 73 USc in the initial minutes after the decision, in which Reserve Bank Governor Graeme Wheeler again said a fall in the currency was needed.

Wheeler said weak global conditions and low interest rates relative to New Zealand were placing upward pressure on the New Zealand dollar.

"The trade-weighted exchange rate is significantly higher than assumed in the June Statement. The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector," Wheeler said.

"This makes it difficult for the Bank to meet its inflation objective. A decline in the exchange rate is needed," he said.

"Domestic growth is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy. However, low dairy prices are depressing incomes in the dairy sector and reducing farm spending and investment," he said.

"High net immigration is supporting strong growth in labour supply and limiting wage pressure."

Wheeler said that house price inflation remained excessive and had become more broad-based across the regions, "adding to concerns about financial stability," and he noted that the bank was consulting on stronger macro-prudential measures to help risks to the financial system from the rapid escalation in house prices.

'Inflation expected to rise next year'

"Headline inflation is being held below the target band by continuing negative tradables inflation. Annual CPI inflation is expected to weaken in the September quarter, reflecting lower fuel prices and cuts in ACC levies. Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, reduced drag from tradables inflation, and rising non-tradables inflation," Wheeler said.

"Although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations," he said.

"Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range. We will continue to watch closely the emerging economic data."

The Reserve Bank's central forecast for the 90 day bill rate included the potential for one more 25 basis point cut to 1.75% some time over the next six months.

Economist reaction

ANZ's Cameron Bagrie:

The OCR was cut but it was not enough to satisfy the market, with the NZD up and rates selling off. Expectations were growing prior that we could see something substantial, but what we got was an entirely balanced and appropriate response in our view. The bill track hints at 1 to 2 more cuts, although alternative scenarios show the risk is for more.

 On most levels we agree with the spirit of the RBNZ’s economic assessment. Strong, above-trend growth is eating into capacity, the NZD is likely to remain high, and housing is problematic – although macro-prudential measures “should” assist. Importantly, the RBNZ is assuming that global conditions improve (alleviating pressures on the NZD) and inflation expectations also gradually lift. We are sceptical. It seems inevitable the OCR will head lower still, though not necessarily immediately. We now expect a cut in November and another in early 2017.

·Stepping back, we still assess this action with a degree of trepidation. The NZD is strong for reasons other than just yield, and inflation is low for more reasons than just the strong NZD. Technology-based deflationary headwinds are growing. We’re not convinced more easing is going to alter that. But we also appreciate the RBNZ’s predicament and the challenge presented by the actions of other central banks forcing global yields lower. The RBNZ cannot swim against this tide. More cuts to come.

Against a backdrop of a market toying with the (albeit remote) possibility of a 50bp OCR cut, and market expectations more consistent with two, rather than one, more cut from here, today’s action and revised projections were not as dovish as the market expected. Consequently, we are not surprised that the NZD and interest rates have popped higher. However, if one takes the view that the TWI will hold up, and inflation expectations are at risk of being further undermined by low headline CPI (Q3 CPI is shaping up to be pretty soft, potentially below the RBNZ’s +0.2%q/q pick), the risk profile remains skewed to the downside.

ASB's Nick Tuffley:

The RBNZ cut the OCR by 25bps as widely expected, and in line with our thoughts it lowered its 90-day bank bill outlook to a low of 1.8% by mid-2017 (implying an OCR of 1.75% if not slightly lower). In addition, the RBNZ retained a firm easing bias of “our current projections and assumptions indicate that further policy easing will be required” Financial markets had been salivating for an indication of an even greater degree of easing, and were left underwhelmed.

Although the RBNZ is still concerned about housing risks, it is also now more concerned about the downside inflation risks, particularly if inflation expectations were to fall further. The NZD Trade Weighted Index assumes the NZD will gently depreciate from around 76, and there is a risk that the RBNZ will have to ease to a greater extent if the NZD doesn’t follow that path. As in the recent Economic Assessment, the NZD was called out as making it difficult for the RBNZ to meet its inflation objective and in need of depreciation.

We continue to expect the RBNZ to cut once further, in November, when the RBNZ has received the next set of key economic data, including key long-term inflation expectations, and has comprehensively redone its forecasts. Weakerthan-expected data or persistent NZD strength could conceivably bring the easing forward to September. In addition, the risks remain skewed to a lower OCR than 1.75%, particularly if the NZD persists above the RBNZ’s (new) assumed level or inflation expectations weaken.


Westpac's Michael Gordon:

In June, the RBNZ’s 90-day interest rate track bottomed at 2.1%, and their rhetoric was consistent with a 2% low in the cash rate. Their updated 90-date projection released today was markedly lower, showing the 90-day rate settling at 1.75%. We expect a further 25bp cut in the OCR in November, which will take it to a low of 1.75%. While there is the possibility of an earlier cut at the 22 September OCR review, we think this is less likely given continued relatively firm GDP growth and only limited new information before the September meeting. Further ahead, much of the need for additional cuts comes down to the NZ dollar – we expect that it will ease by year’s end, but the risk is that it remains high.

First NZ's Chris Green

Significantly the Bank also presents a scenario in which the TWI is assumed to remain around its current level, resulting in their 90-day bank bill profile troughing at 0.9%. While the Bank again reiterated that “a decline in the exchange rate is needed” the presentation of an unchanged TWI scenario and the resulting decline in their projected 90-day bank bill profile underlines that additional monetary easing will be required if the NZD continues to remain elevated. Interestingly the other scenario showing a decline in inflation expectations also results in a lower projected OCR profile than presented in their central scenario.

 Looking ahead, given the backdrop of the RBNZ projecting an additional 90-day rate reduction, together with the maintenance of an explicit easing bias, we expect the Bank to look to undertake at least one further 25bps reduction in the OCR.

At this point, we pencil in a 25bps cut at their 9 November August MPS, taking the OCR to a historic low of 1.75%. However, the dovish tone to the August MPS increases the risk of an earlier and additional 25bps cut at their 28 September OCR Review, which together with an anticipated November MPS cut would take the OCR to a lower trough of 1.50%.

Kiwibank's Zoe Wallis:

The RBNZ's closely watched 90-day track was reduced by 37bps relative to the June MPS - implying at least one more OCR cut and about a 50% chance of an additional cut to take the OCR down to 1.50%. We maintain our call for additional rate cuts in November and February, although acknowledge there is small risk that the RBNZ could choose to move at its next meeting in September. In addition, the RBNZ included two alternative scenarios in today's MPS - both to the downside.

One of these was the same scenario included in the June MPS, whereby the NZ TWI remains elevated around current levels even as the RBNZ continues to cut the OCR - in this case, the OCR could be cut as low as 0.75% by 2018. The other scenario highlights the risk that with inflation tracking lower for longer, inflation expectations decline further; requiring a greater extent of monetary policy easing and suggesting the OCR would need to be cut down to 1% to generate sufficient inflation pressure in the economy. Given the currency reaction we have seen this morning we agree that the risks remain skewed to the downside.

Political reaction

Labour Finance Spokesman Grant Robertson said the Government needed to get serious about supporting the productive sector and help the Reserve Bank by addressing the Auckland housing crisis.

“With the dollar surging immediately after the OCR announcement it’s clear that monetary policy is having limited positive impact for exporters. The Government cannot outsource managing the economy to the Reserve Bank, it needs to take concrete steps to ensure hard-pressed exporters can compete internationally," Robertson said.

“Bill English needs to take responsibility for the decision by some trading banks to pass on only a fraction of the cut. This is another example of government failure leaving someone else to dictate public policy. The Government has failed to fix the housing crisis in terms of either supply or demand, and some banks have decided to take matters into their own hands," he said.

“National needs to stop sitting on its hands over housing. Today’s announcement won’t build anymore houses but will be another shot in the arm for speculators. It’s essential that National takes on Labour’s comprehensive housing plan to build 100,000 affordable homes, crack down on speculators and close loopholes like negative gearing."

Robertson said the immediate rise in the currency and the banks' decisions not to pass all the cut raised further questions about the limitations of monetary policy.

“More and more traditional approaches seem to be broken. There is an urgent need to review monetary policy, including the Policy Targets Agreement which is now effectively being ignored by the Reserve Bank, given the heroic assumptions that underpin their attempt to meet it in ‘the long term’," he said.

(Updated with more detail, reaction, political reaction)

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Linda Lovelace came to town but didnt swallow. Instead she choked............

Well I've been calling for him to be removed for months now and nobody has cared to join me. What did we all expect?

Remove Governor Wheeler from the RBNZ


Same old, same old. Nothing creative that will make any significant difference. Sleep walking to disaster down the same well worn path that has proved totally ineffective in the rest of the world.


This is outrageous ...not sleep walk rather DEAD walk ... so the RBNZ is now saying that immigration is supporting the economy eh? I thought he was calling on the Gov to limit that ... what does that tell you?? this expired lot in RBNZ - almost like most economist in current era - have turned to Historians telling us what everyone already knows and failing to predict what may happen and ACT accordingly ... I think Roger Kerr was right in saying that FX is not really affected by RBNZ decisions and it has a mind of its own - largely driven by big money investment movements o/seas ... its a pity that the RBNZ does not seem to show that it is aware of that and maybe thinks that FX will come down using concerns, hopes ,and maybe prayers !!!

The RBNZ sounds really pathetic in stating that FX is high and needs to come down, and house prices are excessive and need to come down ... what a joke

Who would join me in betting that the RBNZ will be forced to eat their words and cut again in September ??

Well normally, and with any other RB Governor I would think they'd be forced to eat their words, but this is Wheeler remember. He will drift and waffle his way forward into the history books as NZ's worst RB Governor, telling us things like 'we continue to monitor the situation closely' along the way.

This is too depressing to put up with. I am going to make myself a good mocha, toast a crumpet and put on a good CD - loud. Perhaps Handles Messiah.

We are but pimple on the arse of the Hippo when it comes to our impact on the worlds financial affairs. An irritant and nothing else, we just need to buckle in and enjoy the ride where ever it takes us

Well the Banks will, be able to pass on the whole cut then, if they factored in 50 bsp and had previously stated they could only pass on a small amount of the cut then they will be able to pass on the 25bps. What with record profits and John Key explaining how they can pass on the whole cut...Brilliant

Well the Banks will, be able to pass on the whole cut then, if they factored in 50 bsp and had previously stated they could only pass on a small amount of the cut then they will be able to pass on the 25bps. What with record profits and John Key explaining how they can pass on the whole cut...Brilliant

Incredibly poor decision. Clearly no real concern at the RB about the real sector or the chances of deflation. Again the RB ignores its parliamentary set objectives and again the markets have clearly indicated that the RB does not know what it is doing - the markets have again pushed up the exchange rate. An unelected a bureaucracy should not be as unaccountable as the RB is at present.

"A decline in the exchange rate is needed" says Governor Wheeler.

Well does he think all the traders around are going to throw their hands up in the air and voluntarily give it to him? Rather than peering expectantly over the top of his glasses at everyone he needs to get up and do the job he is paid very well to do.

Get real, it requires Government economic and wider policy changes as well.

It is now obvious that tinkering with the OCR has no or negative impact on the exchange rate (depends on your view point). The only major mover of the Kiwi is the US Fed, so lets give up worrying about inflation (or the lack of it) and get on with productive investment.
We have a booming construction sector, booming tourism, booming agriculture exports (ex diary although showing signs of a turn around), growth of 2.5 -3.0%, low fuel prices. What more do we need - higher bank profits due to low OCR?

He says one thing and then makes the opposite happen. Insipid bureaucrat.

oh Mr Wheeler you have blown it...look Mr Wheeler ill tell you whats happening "its a race to the bottom" and you are losing...

Should be 1.75% - Wheeler inept

The formula is: Aus OCR rate + 0.5 = NZ OCR rate
You jump, I jump

Flip floppas

Why not just whack them to 0 and get it over and done with then? Cuts so far haven't dropped the exchange rate - neither would have 50bps today?

Because he has no idea about how to control house prices; too gutless to require banks to halve their leverage for a start(or maybe BE won't let him)

So embarrassing...

I predicted the nzd would rise this morning, but didn't expect by so much.

I know more than the RB, it seems.

In my view, they should have raised interest rates to address housing.

Actually, I go further, Graham Wheeler should lose his job... he is an anachronism.

New views are needed. Sure, his actions may have worked in the 90's. So, he should retire.

We love these best kept secrets, don't we ?

My guess is that the RBNZ is just counting ( hoping) that something will happen in the world to miraculously push our inflation to 2% - like a huge jump in oil prices or an outright war somewhere in the china sea.
Should we believe in conspiracy theory suggesting that our RB just like some others in the OECD are doing what they are told to do ... to keep the balances ?


I'm convinced we don't actually need 2% inflation anyway, which makes the whole debate redundant.

Time for individual bail outs to each NZ citizen, by giving them $5000 which they can spend and boost inflation rate ? Will work better than these OCR cuts...

or change the tax rates so first 10K is tax free, we know those at the bottom of income brackets will spend it, the government gets 15% back anyway with GST

and you are convinced of this why? based on what evidence? data? logic?

Well this really isn't going to help our exports or tourism market (Especially with recent events in the UK).

Graham Wheeler was 'humbled' to receive the Central bank of the year award in 2015, for raising interest rates and RBNZs improved communication .

Ok we can now clear see where we are going. Interest rate is going down further and currency will stay up. This is how Wheeler opreates.
Time to shop online from overseas and keep invest in property.
This is the game plan ...so obvious.

Depositors have more power than this guy(as a collective), they just don't know it yet. Find a matress or alternative to banks people. Otherwise this will end badly for you 'alone' regardless

I have been stock piling my money and converting to bullion for some time now.

Banks do not like it one bit when you go in and ask for large cash withdrawals. They ask all sorts of questions which really are none of their business. They make it quite clear they do not condone you withdrawing your own money. I make certain I keep all withdrawal receipts with the money in case I need to answer any questions about why I have so much cash in the future.

In fairness, that is what banks are required to do under anti-money laundering legislation. You are wise to keep your receipts, for under that same legislation you may well find yourself having to answer such questions.

And I hope you have a strong safe and a good burglar alarm

"And I hope you have a strong safe and a good burglar alarm"

Don't you worry. I've got something much better than that.

Hidden behind a portrait of Donald Trump??

So where would you suggest?

get some Golden Maples from bulliondeals.co.nz or gold kiwis from nzmint.co.nz

im sure you can find a safe place to stash them no one will ever find them (they dont take up much space at all)

Honestly, if you are smart enough to be reading comments on this site, you should have at least 10% of your net worth in bullion of some form. 13 Trillion dollars people, thats the current amount of sovereign bonds around the world with negative interest rates, and its growing by the day.

The banks should not pass on any of the OCR cut at all.
Mortgages are almost free money in any event.
Any mortgage cut will only push up house prices even further.

I wonder what inflation figures would look like if cost of housing was included

and the point would be? Lets say we did and inflation "looked" higher, what then? push up the OCR? Every CB that has done so since 2008 has tanked their economy I believe, ie sent it into recession and cost jobs, do you really want that? I'd suggest not personally.

Perhaps we need less of the same?

There is a sensible way to fix house prices & it's really simple: install loan to income-multiple restrictions like in Britain allowing those with skills & cashflow to get the bigger loans. It favours those that drive the real economy. Unfortunately, the RBNZ seems intent on building this phony bubble - c.90% taxfree increase in Auckland house prices in 4 years is ludicrous!! It will end badly, we'll see a change in government & what's left of our best minds will go overseas.

Ha, not such an oracle perhaps.

This only helps foreigners to beat out locals even more. The amount of chinese money in auckland real estate is staggering.

>60% of landlords have borrowed more than 6X their incomes - restricting it to 4.5X would mean >60% of landlords have a problem - then all of a sudden people start pricing assets on cashflow again.
To stop foreign money, you just do what Vancouver is doing - apply a 15% tax. https://www.theguardian.com/world/2016/aug/02/vancouver-real-estate-fore...

It is all very simple when there is a will - perhaps a bit beyond a surfer though.

So the right wingers with all their models didnt think 2% was possible....ho hum.

No one ever said the rbnz was smart. They cant even instigate basic insurance for deposits, how do you expect them to make sound decisions on macro and micro-economic policy. Shame on NZ universities for putting out such trash students. And tomorrow they will be whining about how real estate is breaking away again. Complete morons setting NZ up for a monetary catastrophe.

Insurance for deposits is dumb (unless it is an optional add-on). If your money is safe, you will take bigger risks. Banks get away with paying lower rates of interest because they are safer. If a bank can no longer compete because it is safer then they only way they can compete is by taking more risks to offer a higher return.

Loan to income limitations will certainly restrict first home buyers from ever owning a home.
If you can service a loan with the Banks current criteria then what is the problem.
It is only the Auckland market that is ridiculously overvalued, so if the RBNZ want to stop that market then limit the LTI criteria to there alone.
Most property investors who provide the housing for people if they were limited would not be able to buy anymore due to the limitation.
True property investors rather than speculators do not force prices up or compete at a ridiculous level.
It is overseas buyers and private buyers that compete in Chch. I as an investor buy under true market value with plenty of upside so that we can get a decent return that is positive rather than negatively geared.

Self righteous Palava.

Property Investors may decide to put their money into businesses that generate jobs instead of property which would do wonders for the real economy & then tenants won't need the wonderful property investors to "provide the housing for people". The reason the market is "ridiculously overvalued" is due to the rules of the game - change the rules and you change the outcome. LTI will not "certainly restrict first home buyers from ever owning a home" because home prices will reduce and become a function of skillset, as opposed to a function of gambling.

Off course it will restrict first home buyers.
Young Auckland couples that are on average money will not get a loan for an average home in Auckland at any stage.
Firstly if they had a deposit of 20 per cent and were grossing 100k between them then under a 4.5 times income they would not get a loan for an average home in Auckland except maybe out in the less desirable areas.
People on this site that tar all property investors with the same brush are pure and simply jealous of successful people who have got off their butts to improve their lives.
Oracle, what are these business's that anyone can invest in that will provide jobs except the sharemarket that is gambling!

You miss the point 'The Man 2'. Gotten off their butts! Hardly - getting a loan, buying a house in Auckland for $700K which turns into $`1.4M 4 years later is hardly "working hard". Hardly anything to be jealous of - good on those that did so. I prefer those that actually create jobs, take a risk, live a little.

Plenty of things to invest in "The Man 2'; in fact there are so many they are only limited by your imagination - go and buy a hostel in Thailand, a gold mine in China, start a B&B, approach some uni students on linkedin & fund a tech start up, or put your money into some angel network businesses if you're worried about gambling on the sharemarket (where the dividend yields are normally twice that of Auckland real estate. Go on... dip your toes in... live a little. Because when Auckland house prices crash on the back of the next global credit crisis, you'll wish you had control of some cashflow somewhere...

Oracle. You missed the point.
I agree Auckland prices are too high!
Believe it or not the housing market is not just flippen Auckland.
The country gets sick of hearing about Auckland as if it was the only place in NZ?
Property investors that are just that Investors and not speculators should not be tarred with the same brush as those that moan about the so called investors in Auckland that are really speculators.
Investors invest for yield and capital gain is a bonus!

You miss the point "Da Man 2". Auckland has the highest beta - the tax free capital gains have driven the rest of NZ - thats why AKL matters. I want to tar you with the property speculator brush because unless you're getting 20% gross yield, thats what you are.

Guys, what ever Loan to income limitation is designed to do ...but the actual facts on the ground are that it will sweep almost all FHB and most of the new little property investors and mum and pops who are attempting to join the game now out of the property market ... making property investment limited to the big boys in this business ( and immigrants obviously) who can afford all the combined new rules and then sum. For them its party time and buying season...
I just heard from real estate friends that markets will go crazy until the end of the year and all their big clients are busy re-valuing their properties getting ready to borrow more and buy more before Loan to income limitation kicks in ....they would even take commercial loan rates to buy residential property .. go figure!
The property market doesn't work on hopes and assumptions ... every investor is now certain that prices will not drop and if they ever did in 2 -3 years, it will only be 5 -10% at most after gaining another 20-30% ... history proves that fact ... and holding long term always wins - whether we like it or not,

We can have this debate in 3 months and prove each other wrong , but it is Time to take the heads out of the sand and survive in the current economy and markets instead of contemplating what's going to happen.... that's what I do.

Very well said Eco Bird - I wish I could give it more than one thumbs up.

How about applying the loan to income only to investors buying existing homes ?

There is no difference between true property investors and speculators.... both the same... both have the same risks and returns... you are kidding yourself if you think there is a difference.

Highest Kiwi in a year now!

It will fall once the dealers book their profit..

Brave man to short the kiwi after today's performance!

It has already come down a bit against USD since the morning increase.

The Force of the Cartel is stronger than the central banks

It is a myth that OCR cut will help in todays scenario. Now that .25 was cut expectation was .50 and even if .50 was cut, may be nz$ would have been down for a day or two and than again move up and will want more cut.

Does it help. Rate cut or no - no change to infation so if ocr cut is done to control inflation is not helping.

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