Start of a new era

This week marks the start of a new era at the Reserve Bank. Along with a change in the Governor, the latest Policy Targets Agreement has widened the RBNZ’s policy focus to include labour market conditions. Going forward, changes in the RBNZ’s governance structure are also on the cards.

The RBNZ left the OCR on hold at the February meeting

Last’s week’s Reserve Bank Official Cash Rate review was largely a paint-by-numbers affair. Governor Spencer, in his last turn at bat, left the OCR on hold at 1.75%. The forward guidance paragraph was also unchanged, with the RBNZ reiterating that "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly."

There’s been very little to shift the RBNZ from the position it’s held in recent years. Inflation is below target, and the RBNZ expects it to slow further over the coming year. Against this backdrop, the Reserve Bank has signalled it expects to keep the OCR at its current low level until mid- to late-2019. Combined with expansionary fiscal policy, this is expected to produce accelerating economic growth and, in time, higher inflation.

Our forecasts for the economy are a bit different from the RBNZ’s. In particular, we doubt that growth will accelerate this year due to softening housing market conditions. However, we also expect a lower NZ dollar, leaving us with a forecast for inflation that is only slightly weaker than the RBNZ’s. On balance, we think there is slightly less need to hike the OCR than the RBNZ is projecting, but the difference is minor (we don’t expect a rate hike until the final quarter of 2019).

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