Surprise OCR cut

While many economic forecasters were expecting the Reserve Bank to cut the OCR later this year the central bank moved today shaving another 25 basis points off the cash rate.

Thursday, March 10th 2016, 9:02AM 1 Comment

The RBNZ has cut the OCR to 2.25% citing a myriad of concerns particularly around weaker world conditions and lower inflation expectations.

There are so many concerns around the global economy that further OCR cuts may come.
The bank expects headline inflation to move higher over the year, but take longer to reach the target range of 1-3%.
Its key comments about the future are: “Monetary policy will continue to be accommodative.”
“Further policy easing maybe required to ensure that future average inflation settles near the middle of the target range.”
Floating home loan rates are likely to start falling today following the RBNZ announcement.
While the OCR cut is likely to encourage banks to lower short-term interest rates, longer-term ones may increase.
The RBNZ notes that the cost of funding through longer-term wholesale borrowing has risen with the pick up in financial market volatility.
“The increase in longer-term wholesale costs this year adds to the increasing trend since 2014, which reflects a mix of global regulatory changes, concerns about commodity markets and emerging economies, and broader financial sector risks.”
“To date, strong deposit growth has limited the need for New Zealand banks to borrow at these higher rates. However, acceleration in credit growth over the past year might increase banks’ reliance on higher-cost long-term wholesale funding leading to higher New Zealand mortgage rates.”

Inflation concerns
A key concern for the RBNZ is that the inflation outlook looks weaker than when it released its previous Monetary Policy Statement in December.
It says this is due to subdued economic outlook.
The bank forecasts the 90-day interest rates to decline over the first half of this year and then remain low, “consistent with the weak outlook for inflationary pressure.”
It forecasts the 90-day rate to fall from 2.8% to 2.1% by the middle of next year then sit at that level for some time.

Domestic bliss, except for dairy
On the domestic front the RBNZ says the dairy sector faces “difficult challenges” but domestic growth is expected to be supported by strong inward migration, tourism, a pipeline of construction activity and “accommodative monetary policy”.

In its Monetary Policy Statement it the bank “judges it is appropriate for monetary policy to be more stimulatory than projected in December.”
“This stimulus is need to support continued expansion in the New Zealand economy, and is expected to contribute to GDP growth of around 3% per annum over the next two years.”

Here's what the Reserve Bank said today

Tags: OCR