Seven things to look for in the Reserve Bank’s OCR call
Wednesday, 28 February 2024
Wednesday is official cash rate (OCR) day and all eyes will on the Reserve Bank.
At 2pm, the bank will issue its latest monetary policy statement. That will include whether the OCR is staying at 5.5%, going up (as ANZ predicts) or going down (as virtually no one expects).
But beyond that, there will be evidence in the Monetary Policy Statement of the Reserve Bank’s thinking.
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Here are some things to look out for on OCR day.
The OCR decision itself
Top of the list for most people will be what the Reserve Bank’s monetary policy committee decides to do with the OCR.
Most economists expect it to stay at 5.5% but ANZ expects two hikes to be needed to bring inflation under control. That would take it to 5.75% this time.
“The market is pricing about a 20% chance of a 25bps hike which means we’ll see a bit of volatility in financial markets whatever the decision,” said Mike Jones, BNZ chief economist.
The OCR forecast
The Reserve Bank will also issue a forecast track of where it expects the OCR to go from here.
Jones said even if there was no movement, the Reserve Bank would probably warn that it was still prepared to increase the rate, as it did in November.
Infometrics chief forecaster Gareth Kiernan agreed.
“In November, the bank had the OCR getting up to 5.69% in the September 2024 quarter, implying a 76% chance of a rate hike occurring by then.
“Given its recent comments to the market, I’d expect the bank to maintain or increase its OCR forecast track in the near term. However, its biggest difficulty is maintaining a level of credibility in that forecast track if it doesn’t lift the OCR this time around. If, at the previous meeting, it thought it might need to raise interest rates again, and its outlook has become more hawkish since then, why would it not raise now?”
Jarrod Kerr, chief economist at Kiwibank, said the inflation track was where everything played out. “All the forecasts, updates get punched into a model that spits out where monetary policy needs to be to get everything back to normal, to get inflation back to 2%. I think the track will remain unchanged. We’ve got quite an aggressive track already.”
He said the bank was likely to stick with its forecast of cuts in late next year, even though most economists expected it to be able to reduce the rate earlier than that. “We’ll all be scrolling as fast as we can to the OCR track to see whether that’s changed in any way.”
He said the bank was likely to be concerned about home loan rates having dropped at some of the banks.
“It will definitely be weighing on their minds - do we want mortgage rates falling? My answer is I think we do. There is a lot of financial hardship out there.”
Was it unanimous?
Sometimes, the monetary policy committee has to put its decisions to a vote.
Jones said if that happened it would give some insight into how the committee’s thinking was shifting.
Inflation
Kiernan said another important aspect would be the Reserve Bank’s view of inflation and how quickly it expected price pressures to ease.
Kerr agreed. “We’ve seen a mixed shift in prices over the past year, some things moving as we’d like to see, and some surprising us on the upside which is not good.”
He said it was likely to say that tradeable inflation was doing the right thing and international prices were easing but domestic prices were still too hot. “That’s the key thing we’ll be watching out for - tolerance around domestic inflation.”
Migration
Kiernan and Kerr said migration would be another big question.
“Has it changed its view that the additional demand associated with strong immigration poses inflationary risks,” Kiernan said.
Kerr said he would be interested to see how the bank interpreted the boom. “That’s surprised us all massively to the upside.”
He said the supply shock of a large number of migrants had reduced the pressure on wages, and given businesses more ability to meet demand. But on the other side of the equation, those migrants added pressure to the market with demand for things like housing.
“Previous migration booms have definitely been inflationary.”
He said the fact that it was a younger mix of migrants now coming in should help because they tended not to buy as much. “They might rent a room rather than house, they might not buy a car.”
Labour market
Kiernan said there would be questions about how concerned the bank was about the relative strength of the latest Household Labour Force data.
“And is it concerned about the persistence of wage inflation, even though most of the recent strength seems to be due to public sector agreements, and private sector labour cost growth is slowing as the labour market softens?”
Global economy
The Reserve Bank was likely to also express its view of the global economy, Kiernan said.
“Growth conditions remain challenging, particularly in China. At times last year, the bank seemed to place a strong weighting on the medium-term downside risks posed by China, but these have attracted less attention at the last couple of reviews. How much does the bank see the sluggish global economy and its negative effects on our exporters assisting in bringing inflation down towards 2%pa over the next year?”