By Bernard Hickey
The Reserve Bank of New Zealand has held the Official Cash Rate at 3.5% as expected, but has kept its modest tightening bias despite signs of low inflation and growing calls for rate cuts.
The New Zealand dollar jumped more than 1 USc after the statement on disappointment from some in currency markets that the Reserve Bank retained its tightening bias. Governor Graeme Wheeler said he was surprised by the jump.
"With output projected to grow at or above capacity, CPI inflation is expected to approach the 2 percent midpoint of the Reserve Bank’s target range in the latter part of the forecast period," Governor Graeme Wheeler said in releasing the Reserve Bank's December Quarter Monetary Policy Statement.
"Some further increase in the OCR is expected to be required at a later stage. Further policy adjustments will depend on data emerging over the assessment period," the bank said.
However, the bank lowered its forecast track for the 90 day bill rate, which is seen as a proxy for the Official Cash Rate, by as much as 40 basis points. The bank's forecast track suggests it expects to increase the OCR in the final quarter of next year, before raising it to around 4.25% by early 2017. This remains below the 4.5% neutral rate the Reserve Bank has previously talked about.
Economists have progressively pushed their expectations of the next OCR hike out until the end of 2015 in the last 6 weeks as inflation has softened and the dairy payout has slumped. Some are even talking about the possibility of a cut if the global economy worsens further. The bank effectively retained its 'soft' tightening bias in its forecasts and statements.
"To ensure that inflation and inflation expectations are contained near the 2 percent target mid-point, some further modest tightening is likely to be required," the bank said in its statement.
"The 90 day interest rate is projected to increase by 80 basis points over the coming three years," the bank said. In its September statement it had forecast the 90 day bill rate would rise around 110 basis points.
Wheeler also repeated his warning about the New Zealand dollar being unjustifiably and unsustainably high. Wheeler said lower commodity prices and global financial market volatility had taken some pressure off the currency.
"However, its current level remains unjustified and unsustainable and continues to constrain growth in the tradables sector. We expect a further significant depreciation," Wheeler said.
This wording was unchanged from the bank's previous warning.
Elsewhere in the MPS (Box B), the bank looked at why non-tradable inflation, typically the most stubbornly high type, had been surprisingly weak in recent times.
The bank cited a variety of factors, including subdued global demand, increased retail competition and a lower starting point for the economy's output gap.
"Our research suggests non-tradeables inflation is somewhat lower than we would expect, given current conditions," it said.
News conference
In the subsequent news conference Wheeler said he was surprised by the jump in the currency.
He also ruled out further MacroPrudential measures to slow the housing market.
Economist reaction
ANZ Chief Economist Cameron Bagrie said some overseas observers may have been surprised by the 'business as usual' tone in the statement.
"The NZD rallied a cent on the release, as markets were expecting a move to more neutral tone by the RBNZ, in line with moves to price rate cuts in Australia," Bagrie said.
"Despite the market’s reaction today, the RBNZ’s forecasts are more dovish than September. But they remain more hawkish than just about every other central bank out there, and the NZD took note," Bagrie said. He kept his forecast that the first rate hike would be December 2015, although he noted a number of uncertainties.
Westpac Chief Economist Dominick Stephens said the Reserve Bank's comments were more hawkish than expected.
"The RBNZ reintroduced an explicit hiking bias by saying 'some further increase in the OCR is expected to be required at a later stage. Further policy adjustments will depend on data emerging over the assessment period'," Stephens said.
TD Securities' Annette Beacher also saw the statement as bringing back a tightening bias.
"Compared with an all-but neutral bias in October, however, “Some further increase in the OCR is expected to be required at a later stage” was the hawkish surprise for the markets," Beacher said.
(Updated with currency move, comments from news conferecence, economist reactions)
10 Comments
Mr Wheeler says the NZD is unjustifiably high and we should expect a significant depreciation. In response the NZD goes up a cent and a half in a clear middle finger salute to Wheeler.
Can he articulate what it is about his governance and settings that will cause this depreciation naturally, or will he actually look to do something about it? In the absence of any action, the markets are acting rationally. The government has put a big bold "For sale" sign on the country's assets, for sale or mortgage, and that will require NZ dollars.
Is he keeping a straight face in suggesting that his target inflation band will not be breached on the lower side? Has he given up addressing that, or is the get out, the end of his "forecast period", a rather convenient get out clause?
Stephen - you're reading too much into the NZD move after the MPS. The market clearly went into the announcement short Kiwi expecting the MPS to fully validate the markets current pricing - the RBZ went someway but not completely, and put back in the tightening bias, hence the covering of shorts in the aftermath - the next few days will be the true test of what you say.
What would concern me is that Wheeler was surprised.
With the dairy damage to the economy, the market clearly expected some interest rate relief from RBNZ to prevent the futher damage to the economy.
Since Wheeler has missed that signal, some big folks closed out quick since the NZ equivalent of printing (OCR reduction) to produce more available cash wasn't done. The printing of cash, of course, reducing the value of NZD.
That's how I read the fundamental. yes?
Basel Brush III - Most of the world's problems are caused by "do something" governments, so the "more" they do the worse off we all end up! There's only two thousand plus years of history to reaffirm this fact. Give me a govt that is not hell bent on totalitarian control any day....sadly, that seems to be what a lot of people want and that is what we'll get. It's all in the age of no personal responsibility or accountability....everything is somebody else's fault or the govts fault.
As for the NZD/USD, the RBNZ knows that the USD is going to rally hard over the next year or two, and we could very well be at 0.60 or lower this time next year regardless of what the RBNZ does - so why would they lower interest rates when they are already at historical and unsustainable lows? This only further punishes the savings classes and keeps insolvent govt finances barely above water artificially. In the end, the market will rule and govt debt/bonds will go up in smoke....probably sooner than we think possible.
On the other hand,the governments that do things become the butt of critics who come out of the woodwork based on vested interest,
Those that do nothing ( just like ours) get away with a lot. Ignorance, like the present debacle over a foreign investment register, is no excuse.
Take the easy route? Just plain indolence IMHO.
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