OCR "at or below" 2.5% until the end of 2010

RBNZ cut 50bp and sees OCR "at or below" current 2.5% level until the end of 2010

The RBNZ this morning cut the official cash rate (OCR) 50bp to 2.50% (J.P.Morgan and consensus -50bp), citing the recent tightening in financial conditions, owing to the rise in longer-term interest rates and NZD appreciation, as the main factor driving the decision. Indeed, following the March policy announcement, monetary conditions tightened significantly, movements that Governor Bollard labelled “unwarranted”and “inconsistent with the monetary policy outlook.”

The statement accompanying today’s policy decision was decisively dovish. Had it not been, any extension of the recent distortion in rates markets could have continued to put pressure on firms and households attempting to borrow, stifling already sub-par economic growth. In particular, the policy statement made clear that the OCR will remain low for an extended period and left the door open for further policy easing. In fact, Governor Bollard explicitly said that the OCR would be kept “at or below the current level through until the latter part of 2010,” adding that modest shifts in the OCR could be delivered in coming quarters.

We, therefore, maintain our forecast for another 25bp rate cut in June; this decision will accompany the June Monetary Policy Statement, which is bound to include further, significant downgrades to the RBNZ’s economic forecasts.

The statement also acknowledged signs of stabilization in global financial markets, but made reference to fragile sentiment, weak trading partner growth, falling employment, and a pull-back in investment. Dr. Bollard did, though, highlight that the large decline in the OCR – 575bp of easing has been delivered since July – will soon pass through to more borrowers as a number of fixed-rate mortgages come up for re-pricing. The significant amount of fiscal stimulus already delivered also will support economic growth.

All that said, we believe further monetary easing is warranted. Although there are some green shoots sprouting in offshore economies, “adverse economic forces” are set to remain dominant throughout 2009. Domestic conditions will remain soggy, owing to the massive wealth destruction underway in the highly leveraged household sector, rising unemployment, the falling terms of trade, and easing inflation pressures.

We believe that a terminal cash rate of 2.25% will be reached by June. The risks, however, remain skewed to the downside, but Bollard’s desire to maintain competitiveness in capital markets will remain a key policy consideration. The Governor has oft reiterated his desire to maintain the OCR at levels attractive to offshore investors. The nation’s huge external imbalance has left the economy more vulnerable than most, owing to the enormous amount of foreign capital needed to make up for the deficiency in domestic savings, although there is unlikely to be any further material improvement in the deficit in the near term.

ENDS

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