Reserve Bank holds Official Cash Rate at 1%

Wednesday, 25 September 2019

Reserve Bank governor Adrian Orr surprised markets in August when he announced a 50 basis point cut to the Official Cash Rate.

The Reserve Bank has held the Official Cash Rate at 1 per cent, as had been widely expected by analysts.

The bank surprised markets with a larger-than-expected 50 basis point cut to the OCR in August.

But it said in a statement that new information since then did 'not warrant a significant change to the monetary policy outlook'.

The Reserve Bank will review interest rates again when it publishes its next scheduled monetary policy statement on November 13.

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Banks hadn't been expecting the Reserve Bank to cut interest rates again until November.

The tone of the bank's commentary appears to have created some fresh doubt that an expected further cut to the OCR in November will materialise.

ASB chief economist Nick Tuffley said it continued to expect a 25 basis point cut in November which would take the OCR to 0.75 per cent, but the Reserve Bank's statement suggested that 'wasn't a dead certainty'.

The Reserve Bank has put on its 'happy face' but a decline in heavy truck traffic in August is another sign of what it is up against, says ANZ.

The New Zealand dollar rose by a third of a US cent, suggesting wider second-thoughts.

The Reserve Bank said its monetary policy committee had discussed the impact of cutting the OCR to 1 per cent in August and was 'pleased to see retail lending interest rates decline, along with a depreciation of the exchange rate'.

'The members anticipated a positive impulse to economic activity over the coming year from monetary and fiscal stimulus.'

In a forward-looking comment, the bank said there were 'several key uncertainties affecting the outlook for monetary policy' and a range of possible outcomes.

'Some members noted that ongoing low inflation could cause inflation expectations to fall. Others noted that this risk was balanced by the potential for rising labour and import costs to pass through to inflation more substantially over the medium term.'

But the committee remained 'comfortable with the monetary policy stance', it said.

Employment was 'around its maximum sustainable level' and inflation remained within its target range but below the 2 per cent mid-point, it said.

'Global trade and other political tensions remain elevated and continue to subdue the global growth outlook, dampening demand for New Zealand's goods and services.

'Business confidence remains low in New Zealand, partly reflecting policy uncertainty and low profitability in some sectors, and is impacting investment decisions.'

Global long-term interest rates remained near historically low levels and New Zealand interest rates could be expected to be 'low for longer', it said.

But it said low interest rates and 'increased government spending' were expected to support a pick-up in domestic demand over the coming year.

'Household spending and construction activity are supported by low interest rates, while the incentive for businesses to invest will grow in response to demand pressures.'

There remained scope for more fiscal and monetary stimulus, 'if necessary', to support the economy and maintain the bank's inflation and employment objectives, it said.

Tuffley said a lower OCR remained 'very much on the cards'.

'We continue to expect a 25 basis point cut in November, which today's statement and meeting summary leave the door open for. But by itself the statement suggests that a November cut isn't a dead certainty, even though we think it is the highly likely outcome.

'Beyond November we still see the risks as being for further easing next year, given the risks remain stacked towards the Reserve Bank deciding even more stimulus is need to meet its inflation and employment mandates,' he said.

ANZ chief economist Sharon Zollner said it was a case of 'put you happy face on' from the Reserve Bank.

The door was left open to further cuts 'but not opened further' and markets had reduced the likelihood of a November cut from 92 per cent to 76 per cent, she said.

'Interest rates have fallen substantially and the New Zealand dollar is lower, and there is time to see what effect this has on confidence and economic activity,' she said.

'Nonetheless, forward indicators such as the ANZ 'truckometer indexes' suggest that growth is going to continue to slide over the remainder of the year at least, weakening the medium-term inflation outlook.

'And with inflation expectations already low and falling, we suspect the RBNZ will again feel the need to shoot first and ask questions later – unleashing what little conventional firepower it has left by mid-next year.'