Thursday, September 10, 2015

RBNZ reduces the OCR to 2.75%

As was universally expected The Reserve Bank of New Zealand reduced the Official Cash Rate 25bps to 2.75% this morning.  Forward guidance indicated a further easing in the OCR is likely although this will remain dependent on the emerging flow of economic data.  The RBNZ’s interest rate projections suggest one more cut of 25bps which would take the OCR back to the historical low of 2.5%.  This is consistent with our own forecasts.

The RBNZ has significantly reduced its GDP growth forecasts citing the sharp decline in dairy prices, the plateauing of construction activity in Canterbury and the recent weakening in business and consumer confidence.  Those negative factors are offset to some extent by robust tourism, strong net migration, the large pipeline of construction activity in Auckland and other reasons, lower interest rates and the depreciation in the exchange rate. 

So like us the RBNZ sees weaker-than-previously-forecast growth ahead, but certainly not a collapse in growth.  That said the RBNZ flags an alternative scenario in which global growth is weaker than in their central projection which has obvious flow-on to weaker New Zealand growth should that transpire.  That indicates where the RBNZ sees the balance of risks. 

They are now forecasting GDP growth of 2.1% for the year to March 2016, down from 3.2% in the June Monetary Policy Statement and lower than our forecast of 2.3%.  The RBNZ sees growth of 2.5% and 3.1% in the March 2017 and 2018 years compared with our forecasts of 2.2% and 2.4%.  We are clearly less optimistic on the upside to growth in the back end of the projection period.  More on that in the upcoming issue of New Zealand Insights.

The RBNZ sees inflation back to the mid-point of the target ranger by the middle of next year (2.1% in the year to September 2016).  This is the combination of softer non-tradeable inflation being more than offset by stronger tradeable inflation on the back of the depreciation in the exchange rate.  As I’ve said before, and the RBNZ also acknowledges, the degree of pass through to inflation from the lower exchange rate is open to conjecture.  We will have to wait and see.

In terms of monetary policy I’m still happy with my forecast of one more cut in the OCR and I have that penciled in for the October OCR review.  In the meantime it’s back to watching the data.