The Reserve Bank of New Zealand (RBNZ) conducted its Official Cash Rate (OCR) review this morning, which left the official interest rate at 3.5% as expected. However, RBNZ Governor, Graeme Wheeler, did drop talk of future interest rate rises saying “a period of assessment” is warranted, and also warned once again on the overvalued Kiwi dollar:
The Reserve Bank today left the Official Cash Rate unchanged at 3.5 percent.
The global economy is growing at a moderate rate although recent data suggests some softening in the major economies, apart from the United States. Monetary policy is expected to remain supportive for longer in all the major economies.
Growth in the New Zealand economy has been faster than trend over 2014, reducing unemployment and adding to demands on productive capacity. Strong construction sector activity, high net immigration, and interest rates, which remain low by historic standards, continue to support the expansion. Output growth is expected to moderate over coming years, towards a more sustainable rate.
Lower commodity prices and increased global financial market volatility have taken some pressure off the New Zealand dollar. However, its current level remains unjustified and unsustainable and continues to constrain growth in the tradables sector. We expect a further significant depreciation.
CPI inflation remains modest, and was 1 percent in the year to September. Contributing factors are subdued wage inflation, well-anchored inflation expectations, weak global inflation, falls in oil prices, and the high New Zealand dollar. House price inflation has fallen significantly since late-2013, in part due to interest rate increases and the LVR restrictions.
The economy appears to be adjusting to the policy measures undertaken by the Bank over the past year. CPI inflation is currently at a low level despite above-trend growth. However, inflation is expected to increase as the expansion continues. A period of assessment remains appropriate before considering further policy adjustment.
Following the lower than expected inflation figures, which came in at just 1% in the year to September, the RBNZ has clearly reduced its forward guidance on rate rises. Gone is last month’s “some further policy tightening” statement, replaced by the dovish statements: “inflation is expected to increase as the expansion continues” and “a period of assessment remains appropriate before considering further policy adjustment”.
The previous warning about the high Kiwi dollar rate was also repeated with: “its current level remains unjustified and unsustainable and continues to constrain growth in the tradables sector. We expect a further significant depreciation”.
The RBNZ is done, with house prices and inflation contained through policy innovation (and a little use of the cash rate) and the dollar tumbling on consistent and pointed jawboning. The lessons for Australia are twofold. First, the RBA should have embarked upon the macroprudential course when the RBNZ did, albeit in its own way. Second, the neutral cash rate is now much lower than most in the market think. The New Zealand economy is booming yet 3.5% interest rates have been enough to blow the froth into the Pacific Ocean.
With its relatively weaker economic prospects, macroprudential should be even more effective in Australia and the cash rate not need to go up at all (and probably fall).
