Westpac Institutional Bank Team
Westpac Institutional Bank
The RBNZ has cut rates to a record low. The US has a new president. And New Zealand has once again been rocked by series of large earthquakes.
A record low
At its November policy decision, the RBNZ cut the Official Cash Rate (OCR) to a record low of 1.75%. This came against a backdrop of very low headline inflation, and associated downside pressure on inflation expectations. The decision was strongly signalled, and failure to deliver would have risked sharp moves higher in both the New Zealand dollar and wholesale interest rates – effectively resulting in an unwanted tightening of monetary conditions.
This is likely to be the last cut in the current cycle. However, with inflation projected to return to the 2% target only very gradually, we expect the OCR to remain at its current very low level for an extended period.
New Zealand’s inflation environment is changing. In recent years, a string of temporary factors, such as falls in international oil prices and policy changes, left the RBNZ with a persistent undershoot of the inflation target. The impact of those factors is now slowly passing out of annual inflation figures. As a result, we will see inflation mechanically rising over the coming year. Consequently, the challenge the RBNZ is facing has evolved into a very slow return to the 2% target midpoint, with lingering softness in imported inflation a key challenge.
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