Low interest rates set to continue

Interest rates look set to remain low for a considerable amount of time following the Reserve Bank’s Monetary Policy Statement (MPS) and OCR call this morning.

The Reserve Bank kept the OCR on hold at its historic low of 1.75% and retained a neutral bias – but suggested that the OCR’s next move could be either up or down.

Acting Governor Grant Spencer says that monetary policy will remain accommodative for a considerable period as numerous uncertainties remain and policy may need to adjust accordingly.

That means that, depending on what unfolds on the domestic and global economic front, there is no guarantee that OCR hikes are looming.

Economists expressed little surprise at the Reserve Bank’s call – although many say they now expect to see the OCR on hold for longer than they have previously forecast before it starts to rise.

What most found interesting was the Reserve Bank’s comments on the broader economic issues of growth and recent weaker than expected inflation results.

ASB chief economist Nick Tuffley says the Reserve Bank has revised up its “speed limit” for economic growth, which is one contributor to its slightly lower inflation outlook for 2018 and 2019. 

But as its forecasts stand, the Reserve Bank has inflation comfortably tracking close to the 2% target mid-point from June 2019, when it hits 1.8%. 

“On the back of that, the Reserve Bank’s outlook for interest rates hasn’t changed: low for a considerable period.”

The Reserve Bank’s OCR forecasts are roughly the same as in the November MPS, which implies a late 2019 start for OCR hikes, he says.

“Our expectations are for a sustained period of subdued inflation – and with that comes the risk that the OCR lifts later than our long-held view of February 2019.”

Tuffley adds that there’s a lot to happen – including a new Governor and the fine-tuning of what the new Government will mean for future inflation pressures – until the Reserve Bank needs to lift interest rates.

NZIER senior economist Christina Leung agrees the Reserve Bank’s growth forecasts were of interest and point to the OCR being lifted later than they anticipated.

“But they took care to retain the neutral bias and maintain a very cautious tone, probably because there is a lot of uncertainty stemming from overseas.”

For Westpac chief economist Dominick Stephens, the main points of the MPS were very much as expected, but he perceives a little more dovishness at the Reserve Bank.

“The overall tone sounded resigned to ongoing low inflation.

“The Reserve Bank has slightly downgraded its inflation outlook, but has held its nerve on what it intends to with the OCR, issuing the same OCR forecast as November.”

Stephens himself has long picked late 2019 for the next OCR rise.

He also notes that the Reserve Bank took the recent resurgence in the housing market in its stride and maintained its longer-run view of house price inflation.

“Equally, the Reserve Bank was sanguine about the recent lift in the exchange rate.”

Infometrics economist Mieke Welvaert thinks the Reserve Bank is taking a wary stance in their overall outlook, probably due to December’s much weaker than expected CPI result.

“They are saying things are going along OK, but there are risks and potential problems there.

“But they are being very careful with their language, particularly around the new Government and the potential impact of its policies, like KiwiBuild where they hint at some lag.”

The Reserve Bank is also signalling a watchful eye on the housing market and the impact of its easing of the LVR restrictions, she says.

“They recognise that the housing market’s momentum is falling away but they want to protect the impact of the LVRs. So they will stop rolling them back if the market starts to take off again.”

But for BNZ head of research Stephen Toplis, today’s MPS didn’t provide any reason to change their view that the Reserve Bank will start raising interest rates in February 2019 and then move relatively aggressively.

Equally, they concede that there are multiple risks around their hypothesis, he says.

“In addition to economic developments, we will have a new Governor for the next MPS and, potentially, a very different Policy Targets Agreement.

“Whatever the case, though, barring a massive surprise, the chances of a rate hike at the Reserve Bank’s meetings in March and May of this year are near zero.”

Read the Reserve Bank’s OCR statement here

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