RBNZ: OCR stays at 1.75%, on hold guidance maintained - Westpac

Dominick Stephens, Research Analyst at Westpac, notes that the RBNZ left the OCR unchanged and maintained its "on hold" guidance for monetary policy.

Key Quotes

“The RBNZ's OCR forecast shifted to slightly earlier hikes, but the RBNZ still expects to keep the OCR on hold longer than financial markets expect.

• The Reserve Bank left the OCR unchanged at 1.75%.

• The bottom line guidance paragraph was the same as has been used, more or less unchanged, since February this year: "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly."
• The OCR forecast was the tiniest touch higher than in the August MPS forecast. Whereas previously the OCR forecast was completely flat until September 2019, it is now flat until only June 2019. However, the rate of increase over 2019 and 2020 is still very slow. 
• The RBNZ acknowledged that underlying inflation is currently low, but it expects strong GDP growth will see inflation settle at 2%. 
• The RBNZ published two alternative scenarios, one with a higher OCR and one with a lower OCR.
• Overall this was another neutral Monetary Policy Statement, although if anything the skew was a tiny touch in the direction of earlier OCR hikes. The RBNZ still expects the OCR to remain on hold longer than financial markets expects.
• Foreign exchange markets reacted to the change of OCR track by sending the NZD 0.25 cents higher, while interest rate markets were steady. Our assessment at this stage is that the MPS was broadly in line with expectations and no ongoing market reaction is warranted.”

“As expected, the RBNZ acknowledged that the weaker exchange rate will boost inflation, but that the housing market was weaker than previously expected and will be a drag. Less expected was the RBNZ's take on GDP growth. The RBNZ is still very optimistic for the year ahead, arguing that the impact of weaker house prices and construction activity will be offset by low interest rates, strong export conditions and the Government's plan to stimulate the economy with extra spending. The RBNZ stated that GDP growth was expected to strengthen, compared to their comment that it would maintain the current pace in the September OCR Review. This was based partly on the RBNZ's preliminary assessment of the new Government's plans, around which there is obviously a great deal of uncertainty.”

“We are currently working on our own reassessment of the economic outlook in light of the new Government's policies (not yet published). We have come to a similar conclusion to the RBNZ - the new Government will stimulate the economy quite substantially from 2019 onwards. But in our view, the new housing market policies will have a deeper impact on house prices than the RBNZ is bracing for. For primarily this reason, our GDP growth forecast for 2018 is substantially weaker than the RBNZ's. The RBNZ is forecasting 3.6% annual GDP growth in 2018, whereas we expect something more like 2.5%.”

“For now, the RBNZ has opened the door the tiniest crack in the direction of earlier OCR hikes than previously advertised. But in our view, over the course of 2018 the RBNZ will be disappointed by the state of economic growth and will become more dovish. We remain comfortable forecasting no change in the OCR until December 2019, with gradual hikes after that.”