Reluctance to cut may be wrong

The RBNZ cut the OCR by 25bp to 2.5% - but said it expected the cut to be the last one for some time.

In the accompanying monetary policy statement (MPS), the RBNZ said its goal is to get inflation into the middle of its 1-3% target range and the current settings should achieve that.

ASB senior economist Jane Turner said, while the MPS indicated a very mild easing basis, the RBNZ is clearly reluctant to make further cuts.

“It expects that it won’t need to cut again. We disagree with this assessment. We don’t think the inflation targets set will be achieved – without further cuts.

“We think there will be two further cuts and we anticipate that they will be in June and August.”

She said it was surprising how reluctant the RBNZ is to cut, given that economic growth is still slow, unemployment is getting higher and that the New Zealand dollar remains high.

“There is a risk that they will wait too long to cut when it is needed.”

Westpac chief economist Dominick Stephens agreed.

He said that while the RBNZ seemed to be indicating a willingness to cut if required, the detail of the MPS portrayed a central bank that is reluctant to cut.

“We think the RBNZ will be surprised on the downside by inflation, GDP growth, and house prices - and consequently, we remain steadfast in our view that the OCR will fall to 2.0% next year.”

The RBNZ's current stance does call into question the timing of any move below 2.5%, he said.

“We are currently forecasting OCR cuts in March and June, but we will consider whether this timing remains the most appropriate forecast as we digest the MPS more fully.”

However, NZIER senior economist Christina Leung doesn’t think further cuts are on the cards.

She said today’s cut was in line with expectations and the RBNZ expects that it has done cutting for this cycle – although it will cut again if warranted.

“We believe the OCR will now trough at 2.5% until 2017, after which it will start lifting gradually again.”

Leung did think the RBNZ’s statement threw up some interesting changes of tone. 

For example, the fact the RBNZ is putting more bearing on asset prices was a change.

“It is mindful of interest rates that are too low and their impact on asset prices and the economy. This indicates that, although inflation is the Reserve Bank’s main focus, it has a growing interest in financial stability and policy.”

Another departure was Wheeler’s suggestion that Auckland could benefit from some infrastructure spending on the part of the government, she said.

“There have been calls for the government to play more of a role in boosting activity. Making the Reserve Bank do all the work puts quite a burden on monetary policy and there is only so much it can do. The comment is an acknowledgment that there are limits.”

The impact of the cut on rates will be interesting, Leung added.

While floating rates will fall in line with today’s announcement, fixed rates tend to be more in line with expectations of where they will go down the track.

“The NZ dollar has edged up a bit following the announcement. That suggests markets were bracing for something more doveish.

“It could be the case that fixed rates have a similar reaction and long-term effects will be more moderate.”

Forsyth Bar senior economist Matt Sturmer said the main point of the RBNZ’s statement was that this cut was intended to be the last one.

While he noted that ANZ and Westpac have cut their floating rates already, the immediate market response hasn’t been what the Reserve Bank might have expected.

This suggested that the RBNZ won’t get the bang for their buck they were hoping for, he said.

“It is possible everyone is still digesting the cut. We may not have a clear picture of the outcome for a bit. It might occur overnight.”

However, much comes down to the exchange rate and that is largely dependent on what happens overseas, Sturmer said.

“We will have a better idea of what might happen there next week when we see what the US Fed does.”

There was general agreement among the economists that, although the RBNZ mentioned the Auckland housing market, it didn’t focus on it because it is too soon to tell whether the new LVR and tax measures will have an ongoing impact on house price inflation.