First impressions of the RBNZ’s Monetary Policy Statement.
The Reserve Bank today left the OCR on hold at 1.00% and issued a neutral outlook for the OCR. However, the RBNZ noted that Coronavirus presented downside risks.
This was close to what we expected. If we had to pick a direction, perhaps the RBNZ was a slight touch more hawkish than anticipated. The RBNZ’s assessment of conditions apart from Coronavirus was very much what we expected, and resulted in a quite a lift to the OCR outlook. The slight surprise to us was that the Reserve Bank made only a small allowance for Coronavirus. They are assuming a 0.3% hit to Q1 GDP, which reverses quickly, whereas our base case is 0.6%.
The RBNZ’s assessment has changed markedly. Whereas in November it said employment was “around” the maximum sustainable level, it is now described as “at or slightly above.” Inflation has gone from being “below” to “close to” the target.
The RBNZ cited fiscal policy very prominently as a reason for the change in monetary policy outlook. The Government’s plan to boost infrastructure spending has had a big influence. The RBNZ also mentioned signs of stronger consumer spending, higher GDP growth, and the improvement in the labour market. The latter was described as “an expected outcome of monetary stimulus”.
What was missing was any mention of house prices in the press release or the Summary Record of Meetings. It seems extraordinary to us that the RBNZ has studiously ignored a key consequence of lower interest rates, and a key channel through which monetary policy impacts the economy. Later in the document the RBNZ did acknowledge that rising house prices would stimulate consumer spending. However, the RBNZ still expects house price inflation to moderate quickly, which we regard as unrealistic.
Overall, it looks like the RBNZ expects to keep the OCR on hold this year, unless Coronavirus blows up into something severe for New Zealand.
Financial markets were slightly more surprised by the RBNZ’s change of stance. Markets particularly reacted to the OCR forecast being flat at 1.0%. Swap rates rose about 5 basis points on the day, and the implied odds of an OCR cut by September has so far dropped from 80% to 35%.
