Snap back to reality

As expected, the Reserve Bank repeated its line that the OCR will stay low for an extended period and that the next move could be up or down. However, the RBNZ's interest rate projections and some subsequent comments have made clear the extent to which the ‘down' scenario is a real prospect. We're taking seriously the possibility of a rate cut within the next year, and we think that financial markets should too. However, we expect that some better-than-expected economic data will stay the RBNZ's hand in the near term.

The August Monetary Policy Statement shifted broadly in the direction that we expected. We were saying at the start of this year that the RBNZ's growth forecasts were too optimistic, and that as they came to realise this they would shift to a more dovish stance. This has now come to pass. At the time, financial markets and many forecasters were still predicting OCR hikes this year; the centre of gravity has now shifted towards a much later move.

However, the RBNZ has shifted its assessment even further than we expected. Their updated projection for the OCR is flat until September 2020, a year later than in the May MPS. From there, the next projected move is up, but at a very gradual pace.

At face value, the RBNZ's assessment of the economy certainly wasn't ringing alarm bells. The RBNZ is forecasting growth to accelerate again after a recent slowdown, supported by low interest rates, increased government spending and a rebound in export volumes. The Kiwibuild programme will help to boost construction activity, although the RBNZ has adopted the Treasury's view that Kiwibuild will ramp up more slowly than previously expected. Above-potential growth would lead to greater capacity pressures and a lift in wage and price inflation.

Download The Full Weekly Commentary