RBNZ leaves OCR at 4.75%

Data Flash (New Zealand)
As widely expected, the RBNZ left the Official Cash Rate (OCR) unchanged at 4.75% following the interim review of monetary policy settings.

The press statement accompanying the announcement (reproduced below) confirmed that the RBNZ has shifted from an easing bias to a neutral stance.

That reflects the assessment that the risks arising from continued weakness in the international economy are balanced by a stronger-than-expected domestic economy. The Bank noted that those factors push inflation in opposite directions and that it would become clearer over coming months which factors will dominate.

We view the following two issues raised in the press statement as particularly noteworthy:

The Bank explicitly mentioned Japan as one of the sources of downside risk for the global economy, highlighting the fact it considers the markets' nearly exclusive focus on prospects for the US economy as too narrow. In order to assess how the Bank's global risk assessment is likely to evolve, a close watch of Asian data is suggested.

The Bank mentioned the tightness of the labour market and the risk that annual CPI inflation rates of more than 2% (expected for coming quarters) will feed into wage setting behaviour. That emphasises the importance of the December quarter employment and wage data to be released in early February. Anecdotal evidence suggests that the momentum in wage inflation has been maintained late last year. Going forward, it remains to be seen whether the slowdown in employment growth will be sufficient to cap and reduce wage inflation over the next 12 months, as assumed by the RBNZ in its November forecasts.

Today`s statement is consistent with our view that the New Zealand easing cycle has come to an end. Over coming months, we expect the downside risks to the international outlook to gradually diminish, while the domestic economy should retain most of its momentum, particularly in the construction and housing markets. The RBNZ is expected to commence its tightening cycle in the third quarter of this year in order to ensure that inflation trends down below 2% over the medium term.

Full text of the RBNZ Statement

OCR unchanged at 4.75 per cent

The Reserve Bank today left the Official Cash Rate unchanged at 4.75 per cent.

Reserve Bank Governor Don Brash commented "This decision reflects a balancing of risks between a domestic economy that seems rather more buoyant than we expected at the time of the November 2001 Monetary Policy Statement and continuing weakness offshore.

"As expected in November, growth in the economies of our trading partners has continued to be sluggish. Notwithstanding a widespread expectation that a global recovery is imminent, there remains a material risk that the situation could deteriorate further. The outlook in Japan is of particular concern.

Commodity prices for New Zealand's exports have fallen quite substantially, and rather earlier than expected.

"However, domestically, a combination of factors suggests that activity is currently running quite strongly. Consumer spending appears more buoyant than expected previously, and indications are that business investment is also holding up better than expected. The housing market has strengthened in recent months, and the labour market continues to be relatively tight. As foreshadowed in November, CPI inflation for the year to March 2002 is likely to be well above 2 per cent, which would become a concern if any resultant increase in inflation expectations were reflected in price and wage setting behaviour.

"These factors are pushing inflation in opposite directions. In the weeks and months ahead, the Bank will be watching closely to detect which set of pressures is beginning to predominate," Dr Brash concluded.

Ulf Schoefisch, Chief Economist, New Zealand

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