OCR unchanged at 1.75%, and RBNZ aren’t hiking anytime soon

Short and sweet

OCR unchanged at 1.75%, and RBNZ aren’t hiking anytime soon

Key Points
• RBNZ kept the OCR unchanged at 1.75% and published a short and clearly worded one-page statement.
• Until inflation is well on its way back to the RBNZ’s 2% target midpoint, the OCR is going nowhere.
• There was a slight dovish tilt to this morning’s statement, as the Bank acknowledged recent developments.
• However, the Bank’s “…outlook for the New Zealand economy, as detailed in the May Monetary Policy Statement, remains intact.”
• Recent developments simply underscore some emerging downside risks to the Bank’s view. We maintain our view that the RBNZ is at least a year off from lifting the OCR, around August 2019.
• There was little market reaction to the OCR review; both the currency and wholesale interest rates had fallen overnight.

Summary
Like the May Monetary Policy Statement (MPS), today the RBNZ released a simply worded statement that was loud and clear. Until inflation is well on its way back to the RBNZ’s 2% policy target midpoint, the OCR will remain unchanged at 1.75%. The RBNZ’s May outlook remains broadly intact and risks to the view are evenly weighted either side: “we are well positioned to manage change in either direction – up or down – as necessary”.

There was a slight dovish tilt to the one-page statement, as the Bank tweaked language and acknowledged recent developments. The weaker March quarter GDP outturn published last week suggests a little more spare capacity in the economy than the RBNZ previously thought. In addition, rising trade tensions between the US and major trading partners, poses a risk to robust global growth and inflation – but for now this is only a risk.

While indicators of growth have softened since the May MPS, CPI inflation is on track to rebound from the March quarter’s 1.1% yoy trough. The recent jump in petrol prices will be a feature of June quarter CPI data when released on July 17. Further out, capacity constraints and an expected lift in wage growth over 2018, in our view will see CPI inflation return to the RBNZ’s 2% target midpoint next year. As a result, we maintain our view that the RBNZ is at least a year away (August 2019) from contemplating OCR hikes.

With the RBNZ’s decision and statement coming in as expected, there was little market reaction to this morning’s OCR review. The NZD held around the $0.6800 mark following the circa half a cent fall over the last 24 hours. Yesterday’s ANZ Business Outlook survey was a little gloomy, and ongoing global trade tensions directed markets overnight. NZ’s wholesale interest rates were also largely unchanged. Overnight both short and long-term yields followed international rates lower.

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