OCR call takes backseat

Changes are looming for the Reserve Bank and that has pushed OCR decisions into the background – despite a pending announcement next week.

Reserve Bank Acting Governor Grant Spencer is handing over the reins to new Reserve Bank Governor Adrian Orr who takes up the role on March 27.

Orr’s arrival will be accompanied by a new Policy Targets Agreement (PTA) and a reviewed Reserve Bank Act is set to come into play later this year.

Economists responding to the regular TMM OCR preview survey believe next week’s OCR announcement will be overshadowed by market perceptions around these changes.

ANZ senior economist Liz Kendall says that with interest rates on hold this year, OCR decisions have taken a bit of a backseat.

“You might even say they are being taken for granted. Fiscal policy and potential changes to the PTA and Reserve Bank governance are instead at the fore.”

They may have implications for how the Reserve Bank functions and forms its views so there will be a keen interest in the next MPS – the first under Orr, she says.

“But we don’t expect any major changes in the Reserve Bank’s views, at least until he gets his feet well under his desk.

In the meantime, survey respondents unanimously expect the Reserve Bank to continue on a consistent path and leave the OCR on hold at its record low of 1.75% next week.

They also all thought it was unlikely the Reserve Bank would even alter the language it used in its statement to suggest any material changes to its inflation and OCR outlook.

TD Securities head of Asia-Pacific research Annette Beacher says that no-one expects any tweaks to the 1.75% cash rate nor the “policy may need to adjust accordingly” neutral stance.

“We eagerly await the Reserve Bank's expanded mandate (to include a form of 'maximum employment') and the new PTA for incoming Governor Adrian Orr to sign up to.”

Westpac senior economist Michael Gordon agrees. He says that as the review is the last under the current PTA there is not much scope for signalling the future direction of monetary policy.

“The recent GDP result doesn’t give the Reserve Bank much to go on and there hasn’t been much in recent weeks that is different to what they expected.

“So we think that the message once again is going to be that interest rates are going to remain low for some time.”

ASB chief economist Nick Tuffley also thinks that little has changed from the February MPS and the Reserve Bank will reiterate a balanced assessment.

“We do not expect any change in their assessment of risks (numerous, but broadly balanced) and guidance on monetary policy (accommodative for a considerable period).”

All survey respondents, bar one – independent economic commentator Michael Reddell – believe the OCR has troughed and most think the OCR will stay on hold till next year.

NZIER senior economist Christina Leung says they expect that the Reserve Bank will reiterate that interest rates will be on hold until well into 2019.

While Kiwibank senior economist Jeremy Crouchman is picking a hike in May next year, Kendall and Tuffley say there won’t be a hike until the second half of 2019.

Further, Tuffley adds they believe the risk of a cut has lifted in recent months given the unexpectedly low Q1 inflation outcome and near-term downside risks to inflation.

But Beacher says they will wait for the new mandate to reassess their OCR tracking for this year and next.

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