Economy

Orr dovish but not as dovish as the market expected

Reserve Bank governor Adrian Orr’s latest monetary policy statement was on the dovish side, but not as dovish as the market had been expecting.

As expected, he held the official cash rate steady at its record low of 1.75 percent, where it has sat since November 2016, and said it will remain there until 2021, a couple of quarters later than it forecast in November.

And the next move could be either up or down.

Consequently, the New Zealand dollar jumped as high as 68.47 US cents from 67.35 cents immediately before the statement was released.

“Some of the details were less dovish than we might have expected. Overall, the Reserve Bank has stuck to its view that inflation pressures in New Zealand are slowly building,” says Dominick Stephens, chief economist at Westpac.

He notes the central bank’s downside concerns are centred on the global economy and trade tensions; it remains reasonably upbeat about domestic conditions.

Stephens reckons some of the detail within the statement seemed out of date.

“Export commodity prices are described as having ‘already softened,’ but in fact they have seen some significant gains recently,” he says.

Ditto with GDP which the Reserve Bank is expecting to rebound to grow 0.8 percent in the December quarter of this year “but recent indicators point to something much weaker” and the central bank hasn’t incorporated recent revisions to net migration data.

ASB Bank chief economist Nick Tuffley says the Reserve Bank’s inflation outlook is substantially lower over the next year with the 2 percent target midpoint being reached in late 2020, six months later than forecast in the November monetary policy statement.

“The statement reinforces the ‘lower for longer’ view but both our and the Reserve Bank’s OCR views are contingent on the economy regaining momentum over 2019,” Tuffley says.

For her part, ANZ Bank chief economist Sharon Zollner is sticking to her guns by predicting a cut in the OCR in the December quarter this year. She expects growth will be disappointing.

“In all, the Reserve Bank remained careful to keep its options open. The two upside/downside alternative scenarios were much as we expected. However, the calibration of these indicates the bank considers the risks around their updated projections to be balanced, whereas we continue to see them as skewed to the downside,” Zollner says.

Infometrics economist Paul Barkle shares Zollner’s view that we’ll get an OCR cut late this year. “The bank’s inflation forecasts throughout 2019 and 2020 are notably lower than in November, adding some weight to the possibility of an interest rate cut,” Barkle says.

The Reserve Bank now expects inflation won’t reach 2 percent, the midpoint of its inflation target, until December 2020, six months later than it had forecast in November.

Similarly, the central bank is expecting quarterly GDP growth between now and June 2021 will ease, falling from 0.8 percent this quarter to 0.7 percent in the June quarter, down from its 0.9 percent forecast last November. It is picking growth will ease to 0.6 percent by the December quarter of 2020.

Bank of New Zealand’s head of research, Stephen Toplis, says the Reserve Bank’s hurdle for raising the OCR “looks very high” and so he has pushed his own forecast of the next rate hike out further.

“Could the next move in interest rates be down? Absolutely. In particular, if the wheels fall off the global economy then the backwash from this could demand some extra help from the Reserve Bank. But these are risks and should not be considered as the central forecast,” Toplis says.

“Don’t forget that currently we already have a good deal of monetary stimulus, there’s more fiscal (or government) stimulus on its way and this at a time when the economy is already significantly capacity constrained,” he says.

“The last thing we need now is stimulus in excess of what we’ve already got."

Toplis is picking the next move will be an OCR hike, not in November as he was forecasting going into today’s statement, but in May next year instead.

“There is still a chance that any tightening comes earlier than we have forecast but, equally, we could see rates stay where they are for a much more protracted period of time.”

This was the last OCR decision Orr will make on his own – he and Finance Minister Grant Robertson will formally sign the new Reserve Bank Monetary Policy Committee Remit tomorrow and future decisions will be made by the new monetary policy committee.

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