RBNZ: OCR to stay on hold for some time - Westpac

Analysts at Westpac expect that the RBNZ’s OCR will remain on hold through to early 2019 and while that’s a little earlier than the RBNZ assumed in their May forecasts (which showed rates on hold until the latter half of 2019), Westpac don’t think this is a big difference.

Key Quotes

“The key point is that we are in for an extended period where the OCR remains very low.”

“However, financial markets more generally expect to see rates rising sooner. In fact, current market pricing is consistent with at least two rate hikes before the end of 2018, with the first coming around June next year. We think this is far too early.”

“It’s true that inflation has picked up. The Q1 read of 2.2% was not only above the mid-point of the RBNZ’s target band, it was the highest read in five years. However, much of the rise in inflation over the past year has been due to temporary factors. That includes weather related increases in produce prices as well as earlier gains in fuel prices. These factors will reverse over the coming year, and the resulting downturn in inflation will be exacerbated by the recent downturn in oil prices. This means that mid-2018 will see headline inflation dropping back into the lower part of the RBNZ’s target band.”

“What’s more important for the OCR is the longer term trend in prices. Looking at measures of underlying inflation in the economy, we see that they have been rising over the past year, but they remain below the 2% target mid-point. Over the coming years, underlying inflation will pick up as the economy continues to expand. But as long as the pickup in underlying inflation remains gradual, and inflation expectations remain well anchored, the RBNZ is unlikely find itself under pressure to raise rates by this time next year.”

“Reinforcing the case for continued stability in the OCR are changes in borrowing rates. Even though the OCR has remained low and on hold for most of the past year, borrowing rates have been creeping higher, and we expect that they will continue to rise gradually over the coming year. Global term interest rates have risen since last year in response to expectations of tightening by the Fed. At the same time, New Zealand's banks are facing higher funding costs as borrowing outpaces deposit growth. Both of these factors reinforce the need for the OCR to remain low in order to support activity.”