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Weekly Commentary

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Suspended sentence

Mon, Nov 2 2009, 05:54 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

The RBNZ’s decision to leave the cash rate on hold at 2.50% came as no surprise, but the focus was on whether they would alter or replace the ‘bias’ sentence at the end of the statement.

In recent statements, the RBNZ have noted that “we continue to expect to keep the OCR at or below the current level through until the latter part of 2010.” Our view was that, with the recovery unfolding rapidly, the RBNZ would give themselves more flexibility with a statement along the lines of “it is appropriate to keep the OCR at low levels for a considerable period”.
This would have both given them some breathing room in terms of the timing of rate hikes, and recognise that even a few hikes would still leave the OCR at abnormally low levels.

In the event, there were some cosmetic changes but the thrust of the statement was broadly unchanged. The first change was that the last vestiges of an easing bias were removed, with “at or below the current level” becoming “at the current level”. The second change was that “the latter part of 2010” became “the second half of 2010”. Arguably these words are synonymous, but compared to the interest rate projections in the September Monetary Policy Statement, which were consistent with no hikes until Q4 2010 at the very earliest, the latest statement allows for the possibility of hikes by Q3 next year.

The RBNZ acknowledged the continuing improvement in both global and domestic activity. But once again they raised concerns that the recovery is being skewed towards domestic demand and away from exports – without shedding any light on what this means on balance for monetary policy. Our view is that since domestic demand bore the brunt of the recession, while exports held up relatively well, the recovery will inevitably be skewed towards those sectors that have the most ground to make up.

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Published on  Mon, Nov 2 2009, 05:54 GMT