OCR call sticks to the script

Keeping the OCR on hold was the move expected of the Reserve Bank today, but economists say it means there will be another cut in November.

Thursday, September 22nd 2016, 12:00AM

by Miriam Bell

This morning the Reserve Bank announced the OCR would be staying at its record low of 2.0% but, again, noted concerns about low inflation and the high New Zealand dollar (NZD).

Reserve Bank governor Graeme Wheeler said that, for these reasons, monetary policy will continue to be accommodative.

“Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.”

Westpac senior economist Satish Ranchhod said the Reserve Bank had clearly stuck to the script with this call.

The language used by the Reserve Bank in their commentary around forward thinking was almost unchanged from their last announcement in August, he said.

This was probably deliberate as any change could have given the false impression that the Reserve Bank was wavering on further easing.

“In saying ‘further policy easing will be required’ the Reserve Bank is signalling a further cut is required to achieve their inflation targets.

“We think that, given the state of inflation growth, that is about right.”

Ranchhod said that although the domestic economy is firm with strong GDP growth and a rise in dairy prices, the NZD is still higher than expected and global economic pressures continue.

This puts the Reserve Bank in a tough position stuck between the high exchange rate and low inflation, although it did note that annual inflation is expected to rise from the end of this year, he said.

“Nevertheless, the Reserve Bank still faces an uncomfortably slow return to the inflation target, with the risk that persistently low inflation leads to a further decline in wage and price expectations.”

Westpac expects the Reserve Bank to cut the OCR again, as it has previously indicated, with the first of any further cuts coming in November.

ANZ chief economist Cameron Bagrie agreed that the Reserve Bank appears locked and loaded to cut in November.

He said the Reserve Bank’s statement today was largely a repeat of the August policy assessment but, importantly, retained a clear easing bias.

“The broad factors shaping the monetary policy outlook are unchanged from what the Reserve Bank had already signalled.”

These factors include the well-performing domestic economy, global fragilities, the strong NZD, low inflation, and the housing market (although the Reserve Bank noted signs of moderation).

Bagrie said the Reserve Bank is facing a battering ram as the NZD won’t go down which impacts on inflation - and low inflation are both a concern and a risk.

“They are between a rock and a hard place in that respect.

“It is made tougher by the fact that New Zealand is a bit player at the international roulette table, so we are blown around by what everyone else is doing.”

As a result, the NZD remains too high and the only way the Reserve Bank can impact on the NZD is to cut the OCR, he said.

“This has flow-on effects particularly for New Zealand’s housing market where it risks pouring more fuel on the fire.”

The Reserve Bank’s easing bias means ANZ expects a further 50 basis point of OCR cuts in November and February.

ASB chief economist Nick Tuffley also said there were no surprises in today’s announcement – leaving the OCR on hold as widely expected and retaining a clear easing bias as it did.

The statement was very much in line with what they were expecting to see, he said.

“The growth story in New Zealand is positive, and the dairy sector is seeing some light at the end of the tunnel.

“But the inflation risks remain skewed to the downside, particularly through the ever-stubborn NZD.”

This means ASB expects the Reserve Bank to cut the OCR to 1.75% in November, with a high risk of a further cut to 1.5% in early 2017.

Tuffley added that the key factors for determining a second cut include inflation expectations, the NZD and developments in bank funding costs.

* Following the Reserve Bank’s announcement, the NZD/USD fell about 30pts to 0.7330. Market pricing for a November OCR cut has risen to around a 70% chance.

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