OCR staying down for the count, says HSBC

For immediate release

RBNZ Observer Update: OCR staying down for the count, says HSBC

RBNZ was on hold today at 2.50%, as expected
Global risks are the order of the day, and seem unlikely to go away soon
We now expect a more extended pause at these low levels, with the next hike now not until Q312

Already on the canvas

Rates in New Zealand are already at historically low levels, so despite global risks, cuts were not a consideration today. Indeed, we see it as unlikely that the RBNZ would consider cutting rates further, and we still expect that the next move is up. But with global risks prominent and the impact of European developments impacting growth in Asia, we believe that the Reserve Bank of New Zealand will be on hold for longer than previously expected.

Like a boxer trying to pick themselves up off the canvas, the RBNZ has been struggling to lift rates from what they were referring to as ‘emergency levels’ put in place after the Canterbury earthquake in February. The RBNZ now has dropped the phrasing of ‘emergency levels’, implying that these low rates may be held for some time yet. Indeed, it may be the case that we have seamlessly moved from one emergency to the next. Where we are may be the ‘new normal’, at least for a while.

Concerns about the outlook stem from both weaker growth forecasts for New Zealand’s trading partners and the impact that the increased cost of offshore bank funding will have on local retail interest rates. RBNZ estimates suggest that the cost of funding has already risen by about 40bps in the past few months. They also clearly note that ‘monetary policy will need to take account of these pressures’.

In addition, New Zealand is highly exposed internationally via the impact of weaker global growth on commodity prices. While dairy and meat prices have generally outperformed other commodity prices so far, there is a clear risk that soft commodity prices could fall by more as global growth slows.

A key way that this will impact New Zealand is by reducing the confidence of the rural sector, particularly in terms of investment plans. Having increased their debt levels substantially in response to the run-up in prices before the Lehman’s failure with the aim of capitalising from the high level of dairy and meat prices, farmers have been more reluctant to invest this time around for fear of another sharp fall in prices.

As a result of these global risk concerns, the RBNZ has revised down its domestic growth forecasts significantly. The bank’s forecasts suggest growth in 2012 will be 2.0%, down from 2.8% in the September statement. This reflects downward revisions across most components, but in particular a reduction in expected investment spending in 2012. Growth is still expected to be supported by the rebuild in Canterbury, though this is only expected to pick up in earnest from mid-2012. Weaker growth is expected to keep inflation contained.

For policy, the RBNZ is still forecasting an upward slope in 90-day bank bill rates, rising to 3.6% by end-2012, implying that they still expect the next move is up. A country with a large net foreign funding requirement, such as New Zealand, would be hard-pressed to lower interest rates too much further, as it may start to have deleterious effects on its ability to fund itself. We believe this will be a key factor that keeps the RBNZ from considering further cuts.

Bottom line

RBNZ was on hold at 2.50%, as expected, today.

The tone of the statement was far more dovish that the last one, with the RBNZ now expecting global events to have more than a ‘mild’ effect on New Zealand.

With rates already at very low levels, we do not expect cuts by the RBNZ in the face of global risks, but we have pushed back our forecasts for the next hike to Q3 2012.

Full copy of RBNZ Observer ORC comment pdf

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