The Reserve Bank has surprised us by shifting to an easing bias for the OCR.
The RBNZ is now saying that “the more likely direction of the next OCR move is down.” It also said that the balance of risks to the economic outlook “has shifted to the downside.” This is very different to February, when the RBNZ said the next move could be “up or down” and that there were “both upside and downside risks.”
With only a few paragraphs to go on, it is difficult to discern exactly how serious the RBNZ is about cutting the OCR. The additional spanner in the works is that a committee will take over the decision making from 1 April, and the committee could chose a different stance. But clearly, the odds of an OCR reduction this year have increased.
We were very surprised by this change of stance, because the economic situation has not changed much since the RBNZ’s last missive in February. Perhaps the main reason for the change of stance was the actions of other central banks. The RBNZ said that a weakening global economic outlook had “prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar.” In other words, the RBNZ might have tailored this statement to meet the expectations of financial markets, who are pricing OCR cuts, thereby avoiding a lift in the exchange rate.
The RBNZ also cited global risks, reduced momentum in domestic spending, softness in the housing market, weak business investment and low business confidence – that surprises us, since none of these factors is much different to the forecasts laid out in the RBNZ’s last missive.
Over the coming month or two, the domestic factors cited are unlikely to improve much. We think domestic spending is showing a lot of momentum, but there is only one minor read on that between now and the May MPS. Business confidence is likely to fall further, inflation will be low due to petrol prices, and the housing market will continue to lose momentum.
Markets interpreted the statement as a major dovish surprise. NZD/USD fell from 0.6910 to 0.6815, AUD/NZD rose from 1.0320 to 1.0440, 2yr swap rates fell 7bp from 1.81% to 1.74%, and 10yr swap rates fell 7bp from 2.21% to 2.14%. We would expect these reactions to extend further over the next day or two.
Full RBNZ statement
The Official Cash Rate (OCR) remains at 1.75 percent. Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down.
Employment is near its maximum sustainable level. However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy.
The global economic outlook has continued to weaken, in particular amongst some of our key trading partners including Australia, Europe, and China. This weaker outlook has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar.
Domestic growth slowed in 2018, with softness in the housing market and weak business investment contributing.
We expect ongoing low interest rates, and increased government spending and investment, to support economic growth over 2019. Low interest rates, and continued employment growth, should support household spending and business investment. Government spending on infrastructure, housing, and transfer payments also supports domestic demand.
As capacity pressures build, consumer price inflation is expected to rise to around the mid-point of our target range at 2 percent.
The balance of risks to this outlook has shifted to the downside. The risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending. On the upside, inflation could rise faster if firms pass on cost increases to prices to a greater extent.
We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.
Meitaki, thanks.
