RBNZ cuts official interest rates for the first time since November 2016; ANZ and Kiwibank immediately cut rates

The Reserve Bank has cut the Official Cash Rate to 1.5% from 1.75%.

The OCR was last changed in November 2016.

This was the first decision to have been made under the auspices of the new seven-strong Monetary Policy Committee, which includes three people from outside of the RBNZ, though is chaired by RBNZ Governor Adrian Orr. The committee reached a "unanimous" decision to cut the rates.

Banks were quick off the mark to react to the change with the ANZ and Kiwibank quickly announcing cuts to both lending and deposit rates.

The Kiwi dollar, which was changing hands at just over US66c prior to the announcement, fell to about US65.7c afterwards.

The latest Monetary Policy Statement released by the RBNZ on Wednesday shows a markedly different trajectory for interest rates compared with the previous MPS released in February.

The latest MPS indicates the possibility, but not certainty of a second OCR cut by early next year. The forecast now sees the OCR bottoming at 1.4% before climbing back up to 1.9% by mid-2022.

The February MPS forecast no cuts and had the OCR rising to 2.4% by early 2022. 

What the economists say

Westpac chief economist Dominick Stephens said his interpretation was that the RBNZ is "genuinely open minded" about whether to cut the OCR again or not.

"We judge the probability of a follow-up OCR cut in June as low. August is more of a live possibility, but our current forecast is that the RBNZ will keep the OCR on hold at 1.5% until mid-2020, when it will reduce the OCR again."

Stephens noted that the OCR cut had caused the Kiwi dollar to fall, while two year swap interest rates felll 15 basis points.

"Mortgage rates have plunged over the past two months, and today’s OCR cut will cause them to fall further. We think the consequence will be an upturn in the housing market, starting in the second half of 2019."

ASB chief economist Nick Tuffley said the next move in the OCR will likely be "data dependent".

"We have pencilled in August but feel the risks are skewed to a later move.  The RBNZ’s current OCR outlook suggests a measured assessment before a further cut rather than a sense of urgency.

"We do not see inflation sustaining around the 2% target mid-point without getting further stimulus.  Moreover, employment growth has slowed, creating a growing risk that the RBNZ may not achieve its maximum sustainable employment objective."

'RBNZ stopped short'

ANZ chief economist Sharon Zollner noted the RBNZ  "stopped short of promising further aggressive action".

"We have long argued that the RBNZ would cut the OCR, but in the end they have taken the plunge a little earlier than we anticipated."

She said “one and done” [one cut and then no more] would be "a very unusual cutting cycle".

"It could happen, since the RBNZ has acted more proactively than has historically been the case, but we continue to forecast that this is just the start of a sequence of three cuts.

"Given the magnitude of the downward revision to the RBNZ’s Q1 growth outlook, the hurdle for near-term further disappointment is high, but the RBNZ’s growth forecasts further out are considerably higher than our own.

"Lower interest rates will support growth, but too-high interest rates are not this economy’s problem at present. We therefore forecast that by November the ducks will have lined up for another cut, followed by one in February. In our view deterioration in global conditions is the primary risk that could bring this forward."

'Lower rates won't generate inflation'

BNZ's head of research Stephen Toplis said while he understands the logic behind the RBNZ’s decision, "our biggest concern remains that lower interest rates will not generate the inflation that the RBNZ so badly wants to see".

"Indeed, even Governor Orr, in his press conference, noted that the lack of inflation was a global phenomenon. This being so, it is unlikely New Zealand will be able to create inflation when no one else can. The absence of inflation is bothering central banks the world over. 

"We again warn that, provided low inflation is not indicative of weak economic conditions but reflects structural change, central banks should not be concerned by this development. There is a very real risk in the current approach that when economies inevitably turn down monetary authorities will have exhausted the ability of interest rates to provide the impetus that might, at that stage, be so desperately needed."

Kiwibank chief economist Jarrod Kerr and senior economist Jeremy Couchman  say the RBNZ will monitor how much of the 25bp cut is passed on to borrowers and savers.

"If not all of the 25bps are passed on, the chance of another cut increases," they say..

"The key takeaway for financial markets is interest rates will likely fall further and hold in an even lower for longer range. And we continue to expect a volatile descent in the Kiwi dollar.".

This is the RBNZ Governor's statement:

Tena koutou katoa, welcome all.

The Official Cash Rate (OCR) has been reduced to 1.5 percent.

The Monetary Policy Committee decided a lower OCR is necessary to support the outlook for employment and inflation consistent with its policy remit.

Global economic growth has slowed since mid-2018, easing demand for New Zealand’s goods and services. This lower global growth has prompted foreign central banks to ease their monetary policy stances, supporting growth prospects.

However, there is uncertainty about the global economic outlook. Trade concerns remain, while some other indicators suggest trading-partner growth is stabilising.

Domestic growth slowed from the second half of 2018. Reduced population growth through lower net immigration, and continuing house price softness in some areas, has tempered the growth in household spending. Ongoing low business sentiment, tighter profit margins, and competition for resources has restrained investment.

Employment is near its maximum sustainable level. However, the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly.

Given this employment and inflation outlook, a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates.

Meitaki, thanks.

As promised the RBNZ also immediately provided a summary of the MPC meeting.

Record of Meeting:

The Monetary Policy Committee agreed on the economic projections outlined in the May 2019 Statement in order to provide a sound basis on which to form its OCR decision.

The Committee noted that inflation is currently slightly below the mid-point of the inflation target, and that employment is broadly at the targeted maximum sustainable level. However, the members agreed that given the recent weaker domestic spending, and projected ongoing growth and employment headwinds, there was a need for further monetary stimulus to meet its objectives.

The Committee agreed that the risks to achieving its consumer price inflation and maximum sustainable employment objectives were broadly balanced around the projection. Possible alternative outcomes were noted on the upside and downside.

A key downside risk relating to the growth projections was a larger than anticipated slowdown in global economic growth, particularly in China and Australia, New Zealand's largest trading partners. The Committee agreed that the projections adequately captured the observed global slowdown and its impact on domestic employment and inflation.

The Committee noted that additional stimulus from central banks had underpinned growth and reduced the likelihood of a more-pronounced slowdown. With some indicators of global growth improving in recent months, a faster recovery in global growth was possible. However, on balance, the Committee was more concerned about a continued slowdown rather than a faster recovery.

The Committee discussed other potential risks to domestic spending. The members acknowledged the importance of additional spending from households, businesses, and the government, to meet their inflation and employment targets. However, they noted several important uncertainties.

The Committee noted upside and downside risks to the investment outlook. Capacity pressure could see investment increase faster than assumed. On the downside, if sentiment remained low as profitability remains squeezed, investment might not increase as anticipated over the medium term. It was also noted that firms' ability to invest is constrained by the current competition for resources.

A potential source of additional demand discussed by the Committee included government spending being higher than currently projected, in view of the current strength of the Crown balance sheet. This view was balanced by the impact of any increase in government investment being delayed, for example due to timing of the implementation of new initiatives and current capacity constraints in the construction sector. The implications for monetary policy remain to be seen.

Some members noted that with lower mortgage rates and easing of loan-to-value requirements, any possible pick-up in the housing market could support household spending growth more than anticipated. The Committee noted that employment is currently near its maximum sustainable level. However, it was agreed that the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019.

The Committee agreed that overall risks to the inflation projection were balanced. The Committee noted the outlook for inflation is below the target mid-point for longer than projected in the February Statement.

The recent period of rising domestic inflation was discussed. The Committee noted that the near-term outlook was more subdued due to lower capacity pressure. It was also noted that cost pressures remain elevated, and that there is a risk firms may pass these costs on as higher consumer prices by more than assumed. However, it was agreed that inflation expectations remain well anchored at the mid-point of the target range.

The Committee also noted the relatively subdued private sector wage growth, despite businesses suggesting that the inability to find labour is a significant constraint on their growth. The Committee noted the limited pass-through of the nominal wage growth to consumer price inflation.

Some members noted slower global growth reducing imported inflation was a downside risk to the inflation outlook.

The Committee reached a consensus that, relative to the February Statement, a lower path for the OCR over the projection period was appropriate. The lower path reflected the economic projections and the balance of risks discussed, and is consistent with both inflation and employment remaining near the Committee's objectives.

After discussing the relative benefits of holding the OCR and committing to a downward bias, versus cutting the OCR now so as to establish a more balanced outlook for interest rates, the Committee reached a consensus to cut the OCR to 1.50%.

Attendees

Reserve Bank staff: Adrian Orr, Geoff Bascand, Christian Hawkesby, Yuong Ha 
External: Bob Buckle, Peter Harris 
Observer: Gabriel Makhlouf 
Secretary: Chris McDonald 
Apologies: Caroline Saunders