No surprises
|The RBNZ keep the Official Cash Rate on hold last week, and we expect it will remain on hold for some time yet. Markets are pricing in a hike by mid-2018. However, we think that’s far too early.
OCR to stay on hold for some time
Last week’s Official Cash Rate review from the Reserve Bank didn’t deliver any surprises. As expected, the RBNZ kept the OCR on hold at the current record low of 1.75%. In addition, the bottom line of the press release was unchanged from the May Monetary Policy Statement, noting that “Monetary policy will remain accommodative for a considerable period.”
Developments since the RBNZ’s previous policy statement in May have been broadly neutral from a policy perspective. While we’ve had lower than expected house price inflation and GDP growth in early 2017, these surprises have been balanced against stronger outlooks for both export earnings and fiscal policy. As a result, the RBNZ’s assessment of overall economic conditions appears to have remained largely unchanged.
To generate the sustained rise in underlying inflation pressures that the RBNZ is targeting will require a protracted period of strong activity. And that will require ongoing support from low interest rates for some time yet. We expect that the OCR will remain on hold through to early 2019. While that’s not quite as long as the RBNZ assumed in their May forecasts (which showed rates on hold until the latter half of 2019), we don’t think this is a big difference. The key point is that we’re in for an extended period where the OCR remains very low.
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