Releasing the Handbrake

A key theme in the NZ fixed interest markets over the past 12 months has been the absence of inflationary pressure, turning the chance of further OCR hikes into the series of OCR cuts.

Ahead of the September Monetary Policy Statement, the RBNZ’s approach had been to apply a handbrake on the market getting too far ahead of itself.  In his last speech, the Governor had highlighted that to forecast aggressive OCR cuts the RBNZ would need to be forecasting a recession.  At that stage, the RBNZ wasn’t really even forecasting a slowdown at all – more a case of the economy continuing to grow at 3%, supported by historically low interest rates. 

At the September Monetary Policy Statement, the RBNZ eased some of that pressure by releasing the handbrake a little.   As expected, the RBNZ cut the OCR to 25 basis points to 2.75%.  However, it was the more dovish forward looking messages that took the market by surprise:

• The RBNZ signalled that “some further easing in the OCR seems likely”. 
• Its forecast of the 90 day bank bill rate implied another OCR cut to 2.50%.
• It provided an alternative scenario which included more aggressive cuts in the OCR to 2.00% (see Chart 1).