Reserve Bank surprise: OCR on hold

Wednesday, 13 November 2019

Mortgage rates and interest rates on savings could rise after the Reserve Bank defied bank forecasts and elected to keep the Official Cash Rate (OCR) on hold at 1 per cent.

All the major banks had forecast a 25 basis-point cut, with Westpac reverting to that forecast on Tuesday after the Reserve Bank reported a slight dip in business managers' expectations of future inflation.

That meant a 25bp cut was largely priced into the lending and currency markets prior to Wednesday's monetary policy statement.

But the Reserve Bank's decision to instead keep the OCR on hold means banks will be scrambling to reassess the outlook for next year.

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ANZ chief economist Sharon Zollner had been forecasting two further rate cuts in February and May, taking the rate down 0.25 per cent.

But the Reserve Bank's decision may put that broader trajectory of lower interest rates into doubt.

ASB chief economist Nick Tuffley still expected the OCR to fall to 0.5 per cent next year.

But he said the interest-rate market reaction to the Reserve Bank's decision was 'sizeable', with the two-year swap rate up 21 basis points in the immediate aftermath.

'Financial markets have unwound much of the pricing of OCR cuts,' he said.

BNZ research head Stephen Toplis said it was now assuming the OCR was on hold for the foreseeable future, saying it had 'effectively raised the hurdle' for any future rate cuts.

The New Zealand dollar jumped by just over 0.8 US cents to 64.19 US cents within minutes of the decision being released, with similar strong gains against other major currencies.

The Reserve Bank said that while inflation remained below the 2 per cent target mid-point, economic developments since August did not warrant a change to 'the already stimulatory monetary setting at this time'.

It remained 'prepared to act as required', it said.

Governor Adrian Orr said it was 'certainly not the bank's conscious intention' to try to surprise people.

'Market expectations have been moving around considerably', from a cut being a 50:50 possibility to a 90 per cent likelihood, he said.

Deputy governor Christian Hawkesby said it was inevitable some part of the market was going to be surprised.

Orr said it would be up to the retail banks to decide whether the decision warranted a rise in mortgage rates.

'They have to make commercial business decisions about what they want to do with their customers.

'What we have made very clear is we believe monetary policy is very stimulatory and that we will have to keep it at that position for a prolonged period of time – and that if circumstances change we will act.'

The bank's chief economist Yuong Ha emphasised it expected interest rates to remain low for a long time.

While its monetary policy committee reached a consensus to keep the OCR at 1 per cent, the Reserve Bank said it noted 'the risks to the economy in the near term were tilted to the downside'.

'Economic growth continued to slow in mid-2019 reflecting weak business investment and soft household spending,' the bank said.

'We expect economic growth to remain subdued over the remainder of the calendar year.'

But New Zealand's export commodity prices had been robust and the lower New Zealand dollar exchange rate this year was also providing 'a useful additional offset to the weaker global economic environment', it said.

'Domestic economic activity is expected to increase during 2020 supported by low interest rates, higher wage growth, and increased government spending and investment.

'The low level of the OCR has flowed through to lower lending rates more generally, which support spending and investment.'

ASB's Tuffley said that as well as 'surprising the market' by keeping the OCR on hold, it was notable that its 'OCR forecast' remained unchanged from August.

'The accompanying statements suggest the door is still very slightly ajar for a further OCR cut next year, 'if needed'.

'To us, the RBNZ's new growth outlook still appears too rosy … moreover, the RBNZ has yet to factor in the economic impact of its impending bank capital increases, for which we expect a bigger economic impact than the RBNZ,' he said.

National Party finance spokesman Paul Goldsmith said another lowering of the Reserve Bank's growth forecast for 2019, down to 2 per cent, showed the economy was underperforming despite New Zealand's terms of trade being near record highs.

'Losing this amount of economic growth is worth almost $3 billion to New Zealanders,' he said.

Finance Minister Grant Robertson responded that the Government was rolling out big investments in transport, health and education infrastructure spending and in its operational expenditure.

'What the Reserve Bank governor suggests is heading into 2020 those things will see our growth rates increase.'

The global economy was 'at a particular point in the economic cycle' but the New Zealand economy was growing at a faster pace than many of the countries it traditionally compared itself with, he said.

Real Estate Institute chief executive Bindi Norwell said with employment and inflation levels within acceptable ranges it was not entirely surprising that the Reserve Bank had held the OCR at its current level.

That was especially given 'the rise in median house prices we've seen of late across some of the regions around the country and predictions for house prices in the coming 12 months'.

'We appreciate it is a fine balancing act across difference economic factors and it will be interesting to see what decisions are made in the early part of 2020,' she said.