The RBNZ left the cash rate unchanged at 2.50% last week, which was seen by financial markets and most domestic forecasters as the most likely outcome.
The RBNZ repeated the message from the April OCR review that further modest rate cuts are possible (though not their central view), and that the cash rate is expected to remain at or below the current level until the latter part of 2010.
The RBNZ noted that the economic outlook is weaker than in their March Monetary Policy Statement, and with substantial risks to the downside. But they now seem to be more convinced by the extent and sustainability of the ‘green shoots’ in the economy, in the form of a stabilisation in activity indicators offshore (particularly in Asia) and a pickup in housing and net migration in New Zealand. In fact, a large portion of the MPS was devoted to teasing out the extent and sustainability of the eventual recovery. This focus on the next cycle might seem premature to some, but it’s consistent with the RBNZ’s focus on activity and inflation pressures one to two years ahead.
Their interest rate projections were markedly different from the March MPS. The 90-day rate is expected to remain around the current level of 2.8% until late 2010 – they had said as much in the last two OCR reviews. The more notable change was that the following tightening cycle is projected to be extremely slow, with 90-day rates only reaching 4% by early 2012. This is clearly a message aimed at financial markets to keep a lid on short-term wholesale rates, where recent OCR cuts have been most effective.
