OCR reaction: cut less likely and rates to stay low

Economists believe the Reserve Bank has adopted a slightly more hawkish stance on the OCR, but say the unchanged forecast suggests a continued low interest rate environment.

Thursday, November 8th 2018, 9:34AM

Nick Tuffley, ASB

The Reserve Bank kept the OCR at the record low of 1.75% this morning as widely expected, and also kept its forecast of a rate rise in 2020 unchanged. Yet there were a few subtle changes to the bank's language, with no reference to the rate moving "up or down".

As a result, economists and analysts believe the central bank is slightly more hawkish on the OCR track, but predict mortgage borrowers will enjoy low rates through 2019 and into the following year, as economic growth remains soft and downside risks remain.

The announcement comes off the back of an unexpected drop in unemployment, and rising inflation, spurred by increased petrol prices. Economists believe the likelihood of a rate cut has fallen due to the trends.

CoreLogic senior analyst Kelvin Davidson said the MPS was notable due to the absence of "up of down" language, used in the August statement. He said: "It may have already been absent prior to yesterday’s labour market data, but whatever the case, the drop in the unemployment rate has now seemingly taken a near term rate cut off the table."

ASB's Nick Tuffley also noted the more "hawkish" tone from RBNZ, and said: "I think it was slightly more hawkish they have moved away from the idea of a cut in the OCR. There is more upside risk on inflation and but they have not really responded to that. They are saying they are doing to keep the OCR low and and inflation might rise a bit above 2% in the future."

Christina Leung of NZIER said there were no major surprises in the RBNZ's outlook but pointed out the "hurdle for a cut is not that high", despite the absence of "up or down" language in the MPS. She added: "Ultimately we focus on what they have done to the forecast and there has been no change at all. It doesn't change our expectation that there will be a rate rise in the first quarter of 2020."

Overall, economists say the MPS underlines the belief interest rates will stay low for a considerable time. CoreLogic's Davidson added: "All of this points to a benign environment for borrowers. The RBNZ’s expectation that the OCR will be unchanged until late 2020 (or even slightly into 2021) suggests that domestic mortgage rates will also stay low and stable, particularly given that banks are still fighting hard to attract the best borrowers in the current low-turnover property market.

Tags: ASB OCR OCR forecasts