OCR words open door for cut

As expected by economists across the board, the Reserve Bank has left the OCR unchanged at 1.75% and reaffirmed its cautious, neutral stance.

But there were some changes to the wording in the accompanying announcement and some feel this could indicate a subtle shift.

ANZ senior economist Liz Kendall says the statement was more dovish at the margin, with the OCR on hold “for now”, rather than “for some time to come”, and a subtle change of wording in its forward guidance phrase.

“We need to be careful to not overplay this, but it does suggest a greater willingness to move the OCR lower if necessary. But the key message is this: interest rates will remain low for some time yet.”

With inflation only likely to rise gradually, ANZ thinks the Reserve Bank will maintain a cautious monetary policy strategy until they see inflation rise in a consistent and sustained way, she says.

“We are picking that the OCR will eventually rise, with a hike for November 2019, but a lot can happen between now and then.

“Risks to domestic inflation are skewed to the downside and if conditions deteriorated significantly, a cut could eventuate quite rapidly. Further deterioration in any forward-looking indicators would be a worry for the Reserve Bank."

ASB chief economist Nick Tuffley agrees the Reserve Bank have given more wriggle room around how long the OCR would remain at 1.75%.

The subtle wording shift in the statement may be a nod to some of the risks on the horizon – such as global trade tensions and recent soft GDP growth - and a greater degree of spare capacity, he says.

“All up, the message is comfortably on hold, but the risks have been shifting to a later start to the tightening cycle – we now expect the tightening cycle to start in November 2019 (previously August). 

“We also see growing risk that the next move may be a cut, rather than a hike.

“And, any material economic impacts from weak confidence or sharp trade war escalation do mean the ‘or down’ part of the assessment of the next OCR move shouldn’t be dismissed out of hand.”

For Westpac chief economist Dominick Stephens, the phraseology of the document was quite different to the May MPS but he does not view that as significant.

“The Reserve Bank is saying the same thing in different words: The OCR is on hold.”

But some of the details of the OCR Review were on the dovish side, and that was surprising to them, he says.

“The Reserve Bank’s view that the Government's projected spending impulse is slightly lower and later than anticipated really surprised us and we shall look at this in more detail.”

NZIER senior economist Christina Leung says there was nothing in today’s announcement that would prompt them to change their expectations around the OCR, which is that it won’t move until mid-2019.

“The statement was very keen to emphasise the next move could be up or down but Adrian Orr seems very mindful of not saying anything that could lead to a boost in the NZ dollar.”

While there are economic uncertainties in the mix, particularly on the global front, they are more downside risks that anything likely to alter the central scheme of things, she adds.

Read the Reserve Bank's OCR announcement in full here.