Timing of OCR cut surprises
There is widespread surprise that the Reserve Bank has cut the OCR again so soon.
Thursday, March 10th 2016, 9:56AM
by Miriam Bell
This morning the Reserve Bank cut the OCR by 25 basis points to a record low of 2.25%.
The Reserve Bank cited a range of concerns particularly weaker world conditions and lower inflation expectations for its decision to cut.
They also signalled that further easing of the OCR could be on the cards.
Many economists have been expecting further cuts to the OCR, but few predicted the cut would come now.
For example, all but one of the economists who responded to mortgagerates.co.nz’s OCR preview survey thought the Reserve Bank would hold the OCR at 2.50% today.
ASB chief economist Nick Tuffley said the Reserve Bank was obviously mindful of the broader environment and had made the right decision.
“We believe they have responded appropriately to the risks currently at play – although we do believe that, while there are a lot of global risks, those risks are not necessarily turning to reality.”
He expects a further cut to the OCR taking it to 2.0% and thinks the cut will probably come in June, after the key inflation expectation surveys are released.
Westpac chief economist Dominick Stephens said the cut today was a long held Westpac forecast that had come to fruition.
This meant that while, in one sense, he was not surprised by today’s cut, in another sense, he was slightly surprised.
“Back in January we were actually forecasting that the Reserve Bank would cut at today's meeting. But then the Reserve Bank governor gave a speech cautioning against focussing excessively on headline inflation. The strong language in that speech seemed to pour water on the idea of an imminent OCR cut.
“We became very uncertain about the timing of cuts, but in the end felt it was more likely that the Reserve Bank would hold off before actually moving. Not so - the Reserve Bank instead chose to move immediately.”
He said it looked as though the Reserve Bank will cut the OCR again in June.
ANZ chief economist Cameron Bagrie agreed it was surprising that the cuts had come at this stage.
But he said the cut was not surprising in spirit and that ANZ expected further easing to come.
NZIER senior economist Christina Leung said the Reserve Bank was obviously spooked by the volatility and uncertainty of the global outlook along with poor inflation expectations.
“They are putting a lot of weight on those factors. Yet the domestic economic outlook is positive, as the Reserve Bank noted.
“But with other central banks offshore adopting loose monetary policy, that puts pressure on the Reserve Bank here.”
She now expects the Reserve Bank to cut again later this year.
Meanwhile, there was a strong market reaction to the cut. The exchange rate fell more than a cent, and two-year swap rates fell from 2.45% to 2.28%.
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