Low inflation, a high New Zealand dollar, falling commodity prices and subdued growth all mean the Official Cash Rate should stay on hold at 2.5% this Thursday, according to a shadow Reserve Bank board of economists, academics and business leaders.
Slightly more weight (7% from 5%) was given to the need to raise the OCR than was given in March. Despite this, weightings of the OCR's most appropriate settings showed 'on hold' as the central call, with a 68% weighting, while there was a one-in-four chance a cut in the OCR would be appropriate.
The shadow board was put together by the New Zealand Institute of Economic Research (NZIER). It is independent from the Reserve Bank.
Bank economists are picking the OCR to stay at 2.5% until December this year at the earliest. Others are picking it will remain on hold for longer, such as NZIER principal economist Shamubeel Eaqub, who is picking the OCR will stay at its current level until mid-2013, or perhaps longer.
"The April view extends the ‘on hold’ call from the March statement. Several factors preclude the need for tighter monetary policy. Inflation is currently low, the exchange rate is high, commodity prices are falling and activity is tracking sideways," NZIER's Kirdan Lees said.
Of the nine individual participants, many were strongly of the view that current interest rate settings continued to be appropriate.
"Some participants placed considerable weight on lower rates. Across the board, this summed to a one-in-four chance that an interest rate cut is appropriate," Lees said.
The members of the board are:
Cameron Bagrie, Chief Economist, ANZ National Bank
Luke Bunt, Chief Financial Officer, The Warehouse
Shamubeel Eaqub, Principal Economist, NZIER
Dominick Stephens, Chief Economist, Westpac
Phil O’Reilly, Chief Executive, Business New Zealand
Dr. Viv Hall, Professor, Victoria University of Wellington
Stephen Toplis, Head of Research, Bank of New Zealand
Dave Taylor, Chief Executive, Steel & Tube
Dr. Christoph Thoenissen, Associate Professor, Victoria University of Wellington
About the NZIER Shadow Board
Lees said the NZIER Shadow Board aimed to achieve three goals:
- to encourage informed debate on each interest rate decision
- to help inform how a board structure might operate relative to New Zealand’s current single decision-maker model, where the Governor is responsible for making each decision
- to explore individual board members using probabilities to express their uncertainty.
"The format closely mirrors the Australia Probabilistic interest rate setting project (PROPOL) run by the Centre for Applied Macroeconomic Analysis at the Australian National University," Lees said.
The Board does not meet but each member is asked to give a percentage value for how much they prefer each interest rate. These values are aggregated to form a collective Board view (see above).
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