We shall not be moved

The Reserve Bank left the Official Cash Rate unchanged at 1.75% last week, and restated its view that interest rate hikes are a long way off. Inflation has been boosted for now by some temporary factors, but underlying inflation pressures are still seen to be subdued. The Reserve Bank’s economic forecasts have many similarities with our own, and we still expect the OCR to remain hold until early 2019.

As in its two previous reviews, the RBNZ concluded its May Monetary Policy Statement by noting that “monetary policy will remain accommodative for a considerable period”. This in itself is a fairly innocuous statement: noone was expecting the OCR to rise above a ‘neutral’ level (which the RBNZ now pegs at somewhere below 4%) in the foreseeable future.

What was surprising, though, was that the RBNZ’s interest rate projections were unchanged from the path produced in the February Monetary Policy Statement. The OCR was projected to remain on hold through until September 2019, and then rise gradually further ahead. In contrast, we and the rest of the market had expected the RBNZ to bring forward the expected timing of an OCR hike to some degree.

So what stayed the RBNZ’s hand? Firstly, the RBNZ has looked through the recent rise in inflation back above 2%, attributing it largely to higher food and fuel prices, both of which will only have a temporary impact on inflation. Consistent with this, the RBNZ’s forecasts show inflation falling to as low as 1.1% in early 2018, as food prices drop back from elevated to normal levels.

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