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RBNZ leaves OCR at 5.25%

Data Flash (New Zealand) NZ: RBNZ leaves OCR at 5.25%

After surprising markets with an uncharacteristically bold and unscheduled 50bps cut on 19 September, this morning the RBNZ conformed with market expectations and left its OCR unchanged at 5.25%. The press statement accompanying the move is reproduced below.

In our view, the accompanying statement leaves the door wide open for a further reduction in the OCR - most probably with the release of the 14 November Monetary Policy Statement.

The RBNZ recognises that it is clear that the global outlook has deteriorated since 11 September - in fact, consensus growth forecasts for the G7 economies have been slashed - and that it is inevitable that this will have some impact on the New Zealand economy. It is for this reason that the Bank cut rates aggressively on 19 September.

However, in the RBNZ's view, the size and duration of those impacts remains unclear at present and, therefore, the extent to which further stimulus is required is also unclear. The Bank also noted that in recent months the New Zealand economy has been at least as robust as the RBNZ had expected - a clear reference to the very strong Q2 GDP figures released last week.

On balance, the RBNZ concluded "At this stage, it appears best to leave the OCR unchanged". However, the Bank also noted that it will have "an opportunity for a fuller review of the outlook for economic activity and inflation, and the risks around that outlook", when it prepares its 14 November Monetary Policy Statement.

We think that the statement above implies that the Bank retains an easing bias. However, the Bank was careful to remind the market that policy remains focused on the outlook for economic activity and inflation (our emphasis). On that score, with the economy appearing to be operating above the level consistent with stable inflation, we think that the Bank will be content to allow growth to fall a little below trend over the coming year (we forecast growth of around 2% in 2002).

We continue to expect a 25bps rate cut at the 14 November Monetary Policy Statement meeting. In our view, the risk is that the RBNZ delivers more easing than this central scenario suggests.

At the same time, we think that the RBNZ will not hesitate to rapidly reverse these precautionary moves should the deterioration in global outlook and its impact on New Zealand prove less severe than feared. Thus some re-tightening could occur as early as Q2 2002, especially if the NZD remains around current levels.

OCR unchanged at 5.25 per cent

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 5.25 per cent.

Reserve Bank Governor Don Brash said "The outlook for the world economy, and the likely impact on New Zealand's economy and inflation, remain highly uncertain. It is clear that the global economic outlook has deteriorated since the awful events of 11 September. We will inevitably feel some backwash from that, although our own economy appears to have been at least as robust before the attacks as we had previously expected.

"Our decision to cut the OCR by 50 basis points two weeks ago was a precautionary move that recognised the inevitable adverse effect and the likely impact on confidence. But how large those effects will be, and how long they will last, remains unclear. At this stage, it appears best to leave the OCR unchanged. We will have an opportunity for a fuller review of the outlook for economic activity and inflation, and the risks around that outlook, in our next Monetary Policy Statement, which will be released on 14 November," Dr Brash concluded.

Darren Gibbs, Senior Economist, New Zealand

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