The Reserve Bank today left the OCR on hold at 1.00%, saying that “Economic developments since the August Statement do not warrant a change to the already stimulatory monetary setting at this time.” The RBNZ gave no explicit signal of cuts to come, although it does remain open to the possibility of cuts if required. The OCR track was the same as August, troughing at 0.9%. This implies a 50/50 chance of an OCR cut at some point. Similarly, the RBNZ said “We will add further monetary stimulus if needed.”
The decision not to cut the OCR was a big surprise to financial markets, as financial market pricing indicated an 80% chance of a cut and most economists were forecasting a cut. We are less surprised. In October we pointed out that the RBNZ never signalled a November cut, and our assessment of the information available up to that time did not justify a change to that stance. At that time, we predicted that the RBNZ would leave the OCR on hold and issue a 0.9% OCR forecast. However, yesterday’s weak inflation expectations data changed the balance of available information, prompting us to rejoin the cut camp. Of course, we are kicking ourselves now! But the main point is that this was always a very close call. The RBNZ itself said that they debated the costs and benefits of cutting or remaining on hold, noting that “both actions were broadly consistent with the current OCR projection.” In other words, it could have gone either way.
The RBNZ appears to be pausing to assess how the stimulus delivered to date will affect the economy. The RBNZ acknowledged that the economy is currently weak, but they also acknowledged that commodity prices have been robust, the exchange rate is low, and low interest rates will support spending and investment going forward. The RBNZ did not pay great heed to the drop in inflation expectations in yesterday’s survey, perhaps because market-based measures of inflation expectations have risen.
Today’s decision shows that the RBNZ is not afraid to stare down financial markets. There is often a perception that the RBNZ will tend to act in accordance with prevailing market pricing, for fear of creating significant volatility in interest rates and the exchange rate. Similar to the August decision to cut 50 basis points, today shows that the RBNZ will act on its assessment of the data rather than following markets.
Our long-held view is that the low-point in the current OCR cycle will be 0.75%. We will read today’s MPS before deciding whether we think that low-point will be reached via a cut in February. The RBNZ is certainly open to a February cut, depending on what happens to the data. There are two important factors that could swing the decision. First, we expect the housing market will be much stronger than the RBNZ expects – the RBNZ’s house price forecast for 2020 is 3.5%, compared to our forecast of 7.4%. However, the global financial and economic situation could worsen again before February.
Market reaction
In response to today’s announcement, pricing for mid-2020 has shifted to a 40% chance of a cut. In other reactions, 2yr swap rates rose 18bp from 1.04% to 1.22%, 10yr swap rates rose 13bp from 1.54% to 1.67%, NZD/USD rose from 0.6335 to 0.6417, and AUD/NZD fell from 1.0800 to 1.0683.
