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RBNZ OCR Interim Review - Cash Rate Unchanged

Data Flash (New Zealand) RBNZ OCR Interim Review

As expected unanimously by the market, the RBNZ left the official cash rate unchanged at 6.5%. The RBNZ also issued a short statement - reproduced below - setting out the rationale for this decision.

In its December MPS, the RBNZ had signalled a need for a further 100bps of interest rate hikes over the subsequent 18 months, with an expectation that the first move would occur in early 2001. Today's statement points out that the weakening global economy and strengthening NZD have since reduced pressures on inflation. In addition, one-off factors mean that the spike in headline inflation is likely to be of shorter duration than the Bank envisaged previously, further reducing the likelihood of second-round effects on wage and price setting.

The RBNZ `s statement is silent on likely policy action at the March MPS. Clearly the prospect of aggressive rate hikes has diminished. However, it would be dangerous to conclude that the RBNZ has moved to an easing bias (contrary to the market's reaction - short bill futures rallied 7-8 ticks). We think the RBNZ is genuinely uncertain about its likely next policy move and will be watching the data closely over coming weeks - especially that coming out of the US - as it begins to prepare the full forecast update which will accompany its March MPS.

Our view regarding the near-term outlook for the OCR is unchanged by today's statement. We think that the RBNZ is most likely to leave the OCR at 6.5% until at least May. If evidence of a more pronounced slowdown in the US emerges over coming months, a modest easing in May cannot be ruled out (especially if that slowdown looks likely to have a significant impact on growth in New Zealand's other trading partners). However, if the US slowdown looks likely to remain relatively short-lived - our central view - the OCR is likely to remain on hold until the final quarter of this year, at which point a further modest tightening is likely to be contemplated.

RBNZ Statement: OCR unchanged at 6.5 per cent

The Reserve Bank today announced that the Official Cash Rate (OCR) would remain at 6.5 per cent in the meantime.

Commenting on the announcement, Reserve Bank Governor Don Brash said “In our December Monetary Policy Statement, we noted that the New Zealand economy appeared to be regaining momentum after a mid-year pause, with both consumer and business confidence measures having rebounded strongly. Faced with a very low and stimulatory exchange rate, and a consensus outlook on the world economy that remained robust, it appeared likely that a gradual further rise in the OCR would be needed this year.

“Since then, the exchange rate has strengthened. Perhaps even more important, expectations for global growth this year have slowed appreciably. This fall-off in expected growth has been most notable in the United States, but is also a feature of the outlook for Australia and for much of Asia.

“Although CPI inflation was marginally higher than we had expected in the December quarter, the main factors driving the spike in inflation were one-off in nature, as anticipated in the December Monetary Policy Statement. Other one-off factors now suggest that the peak in the CPI may be of rather shorter duration than we had earlier expected, with a commensurately reduced risk of spill-over from this spike into generalised wage and price setting behaviour.

“Given these factors, we feel we can prudently leave the OCR unchanged for the moment. We will have another opportunity to assess the situation when we issue our next Monetary Policy Statement on 14 March,” Dr Brash concluded.

Darren Gibbs, Senior Economist, New Zealand
This, along with an extensive range of other publications, is available on our web site http://research.gm.db.com

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