RBNZ Monetary Policy Statement and OCR cut to 2.75%

10 September 2015

News release

RBNZ Monetary Policy Statement and OCR cut to 2.75%

As widely expected, the Reserve Bank of New Zealand (RBNZ) has reduced the Official Cash Rate (OCR) by 25 basis points (0.25%) to 2.75% at today’s Monetary Policy Statement. PwC Partner and Treasury Advisory Lead Roger Kerr says, “Having cut interest rates at the last three OCR review dates, the timing of the next cut is now considerably less clear.

“The markets were expecting that a fourth cut would occur in late 2015/early 2016 and the RBNZ appears to have pushed that timing forward to mid-2016. Whilst the RBNZ has stated that a fourth cut to 2.50% is likely, as always, it is dependent upon the emerging economic data as to whether that will be necessary or not. It would take stronger growth and a more rapidly increasing annual inflation rate than currently expected to dissuade the RBNZ from a fourth OCR cut to 2.50%.

“The RBNZ forecasts the economy to slow marginally to a growth rate near 2% in 2016 before accelerating thereafter as stronger growth in our trading partners, and a recovery in commodity prices, helps to support growth. The RBNZ’s GDP growth forecasts appear more balanced than some of the very pessimistic private sector economic forecasts of late. As the RNBZ correctly highlights, industry sectors outside dairy remain robust with the lower interest rates and lower exchange rate delivering considerable stimulus across the board.

“The global downside shock scenario painted by the RBNZ that would cause them to cut to even lower OCR rates of 2.00%, in our view has a quite low probability of actually occurring. The risk to our economy centres around whether China experiences a ‘hard landing’ on their economic slowdown, or not. In our opinion, the Chinese monetary and Government authorities will deliver stimulus packages to prevent a rapid slowing in the Chinese economy. The potential for a global shock or crisis that would be negative for the New Zealand economy can appear to be over-hyped in some quarters.

“Whilst the RBNZ is forecasting much higher inflation in 2016, largely due to a weaker currency, it still does not seem to have a strong understanding of how this dynamic will play out in terms of timing and magnitude. Our anecdotal observation is that importers/wholesalers/retailers are already increasing their prices due to the NZ dollar depreciation over the last 12 months.

“Overall, we believe the tone of the statement was appropriately balanced. The RBNZ has acknowledged that the significant drop in export commodity prices and business confidence support the need for lower interest rates immediately. The tentative recovery in whole milk powder dairy prices over recent weeks would have occurred after the RBNZ economic forecasts were finalised.

“Yet, looking at the medium term, the fundamental drivers of the economy are not broken and the outlook remains positive. Moreover, the much weaker currency will eventually flow through to higher inflation and so ongoing OCR cuts are not so justified.

“Interestingly, the recent volatility in global financial markets has not caused any significant change in the RBNZ’s outlook for the New Zealand economy. Our reading is that the recent plummet in business confidence indices would have been overdone as business firms react to negative media headlines on global events, however their own trading environment remain largely positive,” concludes Mr Kerr.

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