RBNZ pushes pause on OCR

In his OCR statement, Reserve Bank Governor Graeme Wheeler said the exchange rate has been moving higher since September.

“This could, if sustained, dampen tradables sector activity and medium-term inflation. This would require a lower interest rate path than would otherwise be the case.”

ASB economist Chris Tennent-Brown said the RBNZ clearly flagged the strong New Zealand dollar as an issue they are keeping a close eye on.

It has shown much more strength than previously forecast and the RBNZ needs the currency lower to get CPI back on target.

“If the dollar stays up round this level they will probably have to cut the OCR in December. So currency is key to any future cuts.”

The actions of the Fed in the US will also play into the mix, as will the Auckland housing market, Tennent-Brown said.

“But, overall, the RBNZ seems to be comfortable to sit on the sidelines and to watch and wait.”

The RBNZ is now in a “kicking the can down the road” scenario, Westpac chief economist Dominick Stephens said.

“They are making decisions meeting to meeting, so they have left the December monetary policy statement wide open.”

However, Stephens said Governor Wheeler did say that further easing in the OCR was likely.

“So, our view remains that a December cut is the most likely decision – mainly because we expect the exchange rate to remain uncomfortably high.”

Forsyth Barr economist Matt Sturmer also said that, while the decision to hold the OCR was as expected, the key point was the exchange rate comment.

In his view, Governor Wheeler is reluctant to cut the OCR further, but isn’t getting much external help – ie: from the Fed – to hold it.

“This is a warning that if the dollar remains at the level it is or gets stronger than interest rates might need to go lower than previously envisioned.

“At the moment, most are expecting another cut taking the OCR to 2.5% but instead it might end up having to go as low as 2%.”

Sturmer said the RBNZ probably wants to buy some time for the property market to weaken or for the Fed to raise rates which would give them some breathing space.

Prior to today’s announcement, several economists said the RBNZ would probably hold the OCR – although, in their view, it should be cut.

For example, Deutsche Bank chief economist Darren Gibbs said the RBNZ was likely to “needlessly delay” its policy easing until December.

He felt the RBNZ sees some merit in ‘keeping its powder dry’ in the event of a significant downturn in the global economy”.