A new era

It was a pivotal week for the Reserve Bank of New Zealand, which delivered a surprising shift in its monetary policy stance. Our current forecast is for the Official Cash rate to remain on hold over the next few years, but the risks of a rate cut at upcoming reviews, including the next Monetary Policy Statement in May, are very much live. From here on those decisions will be made by a formal committee, with external and internal members.

Last week's OCR review broke decisively from the RBNZ's previous statements, which had noted that the next move could be either up or down. The RBNZ now believes that the balance of risks to the economic outlook "has shifted to the downside," and that "the more likely direction of the next OCR move is down."

This change in stance surprised us, because the economic situation hasn't changed a lot since the previous OCR review in February. Recent GDP data showed that the domestic economy has kept ticking over, with solid growth in consumer spending and construction. Global growth has softened, but not significantly, and the consequences for the New Zealand economy have not been obvious – in fact, our export commodity prices have been strengthening recently.

What has changed a lot since February, however, is market sentiment on interest rates. In the midst of some mixed economic data, overseas central banks have either shifted to more dovish monetary policy outlooks, or are expected to do so. The RBNZ was apparently concerned that if it didn't join the flock, there could be an undesirable rise in the New Zealand dollar, which would suppress inflation and ultimately force the RBNZ to change its stance anyway.

Download The Full Weekly Commentary