OCR on hold at 0.25 per cent as Reserve Bank signals it will stick to its guns

Wednesday, 24 February 2021

The Reserve Bank has risked being recast from a ‘Covid hero’ into a house price villain as doubts have grown that its monetary stimulus measures have all been necessary.

The Reserve Bank has confirmed the Official Cash Rate is staying on hold at 0.25 per cent.

The central bank said it would also keep its $100 billion quantitative easing programme and $28 billion Funding for Lending scheme in place unchanged, saying it saw “a prolonged monetary stimulus” as necessary.

The bank said the start of Covid vaccination programmes around the world was positive for future health and economic activity.

But it cautioned that the economic outlook remained “highly uncertain”, suggesting some of the factors that have helped support employment and inflation at higher levels than expected were temporary.

Reserve Bank governor Adrian Orr described the “uncertainties” that concerned it as being international in nature.

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In a dovish statement, it said it would maintain its current stimulatory monetary settings until it was confident consumer price inflation would be sustained at its 2 per cent midpoint target and that employment was “at or above its maximum sustainable level”.

Meeting these requirements will necessitate “considerable time and patience”, it said.

The Reserve Bank issued its monetary policy statement in the wake of Standard and Poor’s upgrading the country’s credit ratings and a growing sense of stability surrounding economic confidence.

Westpac is not ruling out the economy slipping back into a mild recession and other economists are unsure unemployment has peaked amid ongoing uncertainty over the likelihood of further lockdowns.

But ASB joined BNZ this week in forecasting the next move in the Official Cash Rate could be a rate hike next year, with a once-assumed drop to a negative cash rate now looking fanciful.

The Reserve Bank said banks had now carried out the systems changes needed to allow for negative rates, if that came about, and it remained “prepared to provide additional monetary stimulus if necessary”.

The bank noted “the lift in domestic economic activity, as evident across a range of indicators including inflation, employment, household spending, GDP, and asset prices”.

The Reserve Bank emphasised the role relatively low unemployment and migration had played in higher-than-expected house price rises.

But in what may be its most significant comments, it suggested that some of that might be short term.

Its statement said “several of the factors supporting economic activity are likely to prove temporary”.

“Fiscal policy will continue to support the economy, but its impulse is unlikely to be as strong as last year,” it said.

“In addition, economic uncertainty persists due to the sustained closure of international borders and the manifestation of new strains of the virus. These factors continue to weigh on business confidence and investment intentions.”

It said several members of its monetary policy committee noted a projected increase in headline inflation could also in part be explained by “one-off factors”, particularly oil price increases.

It noted house price inflation had been “higher than assumed”.

But it attributed that mainly to “a more resilient labour market and the arrival of more permanent migrants prior to the border closure”.

People who arrived in New Zealand during the early stages of the pandemic and subsequently stayed on, were contributing to both housing and broader demand pressures, it said.

The New Zealand dollar edged a fraction higher in the immediate wake of the announcement, trading up about 0.12 US cents.

But ASB chief economist Nick Tuffley said the key messages from the Reserve Bank were that the environment remained highly uncertain and the medium-term objectives of the RBNZ would not be met without prolonged monetary stimulus.

That might “hose down some of the exuberance that has gripped global financial markets” as vaccine roll-outs brought optimism that the pandemic will soon be put behind us, he said.

ACT Party leader David Seymour said the statement showed Reserve Bank governor Adrian Orr “clearly doesn’t share this Government’s confidence in the economy”.

“By announcing today that he will maintain the current stimulatory level of monetary settings the governor is signalling there is not enough underlying strength in the economy to ease off printing money,” he said.

“He’s going to keep his pedal to the metal, despite admitting the impact this is having on inflated house prices, leading to increased inequality.

The statement was also an indictment of the Government’s response to Covid, he said, as it noted economic uncertainty would be “determined in large part by any future health-related social restrictions”.

“If the Government had adopted a culture of continuous improvement at the border, in managed isolation and through better use of technology responding to the virus this economic uncertainty wouldn’t be such a factor,” Seymour said.

Orr responded that “the number one uncertainty” was global.

“It is a global health crisis and we are talking about global travel restrictions, trade restrictions and social mobility restrictions.

“This is not a New Zealand specific issue,” he said.