Reserve Bank doubles down on promise to keep OCR at 0.25pc until March

Tuesday, 19 May 2020

The ABCs of the OCR.

The Reserve Bank has doubled down on its promise to keep the official cash rate steady at 0.25 per cent until March, saying it is not sure why some analysts believe it may send the OCR negative before then.

Governor Adrian Orr made the commitment to keep the OCR on hold for a year on March 16, at the same time that the Reserve Bank slashed the OCR by 75 basis points to 0.25 per cent.

Questioned on the nature of the commitment at the time, Orr made it clear he was giving the Reserve Bank's word to keep the OCR on hold until at least March next year.

'The commitment stands here. It is the Reserve Bank's word,' he said at a press conference then.

If the Reserve Bank needed to apply an additional monetary stimulus before then, it would use other tools he added.

* What is a negative interest rate, and what would it mean for you?

* Reserve Bank ups 'quantitative easing' from $33b to $60b

Reserve Bank deputy governor Geoff Bascand says he is not sure why doubts are still floating around the bank's OCR commitment, given its 'clear statement'.

Westpac chief economist Dominick Stephens has been among those speculating the Reserve Bank might move earlier, having forecast the Reserve Bank could drop the OCR into negative territory, to -0.5 per cent, in November.

Stephens said the Reserve Bank would be forgiven for breaking its pledge in order to cut further.

But Reserve Bank deputy governor Geoff Bascand told Stuff on Tuesday that the Reserve Bank's word still stood.

'We stick to our commitment. We are keeping the OCR on hold for a year.'

The central bank's statement last Wednesday that its 'forward guidance' was that the OCR would remain at 0.25 per cent until next month was not meant to water down the nature of the commitment, he said.

'I am not sure what that distinction between forward guidance and 'our word' is.

'Our word is forward guidance.'

The Reserve Bank has asked retail banks to update their IT systems to ensure they can accommodate negative interest rates by the end of December.

But Bascand said the earlier deadline was just to ensure the Reserve Bank could verify they were prepared ahead of any possible change in March.

'We want to know the facility is there if we chose to use it.'

Bascand said it was an interesting question whether the bank's tactic of promising to leave the OCR unchanged had failed — given its purpose was to provide certainty to financial markets but that not all banks had believed it.

But he said the Reserve Bank's monetary policy committee had made 'a clear statement' and he was surprised people weren't paying more attention to it.

'It said the committee maintains its forward guidance the OCR will remain at 0.25 per cent until early 2021.

'We are very conscious that our word matters and the credibility of what we say is very important to the Reserve Bank.

'We are confident we won't be moving to negative interest rates before March next year.'

Bascand said a forecast that the Reserve Bank might increase the cap on quantitative easing from $60 billion to a new limit of $90b was 'pretty speculative'.

ANZ has forecast the Reserve Bank might decide to increase the cap in August.

Bascand said the Reserve Bank obviously had 'the potential to do more if we need to'.

'But there is going to have to be another assessment in three months' time when we see how the economy and the whole pandemic is playing out, and what the impact of what we have done so far is.

'In three months time we will probably have a bit more certainty about a number of things,' he said.