Data Flash (New Zealand) RBNZ leaves OCR unchanged
Key points
Consistent with market expectations, the RBNZ left the official cash rate (OCR) unchanged at 5.75% when it released its
quarterly Monetary Policy Statement. However, the market was surprised by the dovish tone of the statement, which noted
that `.we are not treating the potential need for a further rise in interest rates as urgent, or at all certain.'
As a result, the second bill contract rallied around 15 bps, while bond yields fell by 8-4 bps along the curve. The NZD
showed no noticeable reaction. The RBNZ's comments provided a strong contrast to the overly hawkish May MPS, which had
foreshadowed the OCR to rise to around 6.75% by early 2003.
The central projections released today still showed 90 day bank bill rates peaking at 6�%, which would imply one or
possibly two more 25 bps rate hikes, but the above quote obviously suggests that the Bank is not at all certain about
that.
The Bank attributed its change in view mainly to the deterioration in the global growth outlook. In conjunction with the
actual and expected further rise of the NZD, a further-than-expected fall in export commodity prices, and the lagged
effect of the 100 bps hike in interest rates since March, that is expected to lead to a considerable slowing in domestic
demand growth.
The Bank noted that the slowdown in domestic growth momentum had already begun, and that growth would slow to around 2Ÿ%
p.a. over the next year.
As a result, capacity utilisation would fall and lead to reduced inflation pressure. Core inflation is currently running
at around 3%, but is expected to fall to around 2% over the next year.
Regarding the appointment of a new RBNZ Governor, acting Governor Carr said that the Government would receive a
shortlist of candidates in late August and that an appointment was likely to be announced sometime during September.
Our assessment
Today's statement was consistent with our view that there will be no further rate hikes in New Zealand during this
cycle. While the Bank's central scenario includes one (or possibly two) further rate hike(s) during the first half of
2003, the comment `.we are not treating the potential need for a further rise in interest rates as urgent, or at all
certain .' shows little conviction on the RBNZ's part that that will be the most likely outcome in reality. While that
quote relates to potential downside risks to the Bank's growth projections, even without such downside influences, a
further tightening looks unlikely. The key influence will be the forthcoming changes to the Policy Targets Agreement
(PTA) between the Minister of Finance and the RBNZ Governor. The Minister of Finance has criticised the RBNZ for having
been too dogmatic about getting inflation down to the mid-point of the 0-3% target range. The changes to the PTA will
most likely instruct the RBNZ to be more willing to use the full width of the target range. The central forecast
scenario released today shows CPI inflation retreating to around 1¯% over the course of 2003. Had the scenario been run
with an unchanged cash rate from here on, the projection would probably have shown a medium-term inflation rate of 2%.
It would most likely be inconsistent with the new PTA for the RBNZ to tighten during a period of declining growth
momentum for the sole purpose of squeezing another 0.25% out of the annual inflation rate.
While the NZ market will most likely price a domestic policy easing if the Fed decides to lower rates over coming months
(DB's call) , we rate the chance of a corresponding RBNZ rate cut as relatively low at this point. As acting Governor
Carr noted today, while growth in the domestic economy may be slowing, this is occurring from a high level of capacity
utilisation. That makes an early RBNZ easing unlikely. Only if the global situation continues to deteriorate into early
next year would we expect the RBNZ to bring forward the rate cut we have pencilled in for late 2003.
Full text of the RBNZ press statement
The Reserve Bank today left the Official Cash Rate unchanged at 5.75 per cent.
Reserve Bank Acting Governor Rod Carr commented "Since our May Statement, prospects for the international economy have
become increasingly clouded, with sharp falls in equity markets and heightened investor nervousness in the US and
elsewhere. Although the New Zealand economy has performed well over the past year, the odds of an international slowdown
have increased, which would have adverse consequences for the performance of the New Zealand economy.
"This renewed global uncertainty occurs at a time when the outlook for inflation has been of concern. Indicators of core
inflation have edged up to around 3 per cent following a sustained period of higher-than-average pressure on the
country's productive resources.
"Gauging the extent to which the path for inflation will be affected by recent global developments is no easy task.
Quite plausibly, the impact of recent global developments will remove much of the existing upwards pressure on
inflation. But, conversely, the economy may continue to grow at a pace that maintains pressure on resources. Indeed,
some of the recent drivers of strong domestic economic activity, including the sharp turnaround in net immigration, may
not dissipate rapidly even in the event of softer international conditions.
"Monetary policy involves carefully weighing the competing risks. On balance, we feel that current global developments,
recent falls in export prices, an exchange rate higher than on average last year, and the lagged effects of the interest
rate increases earlier this year are likely to dampen inflation pressures sufficiently going forward. In May it looked
likely that further increases in interest rates would be required over the coming year to keep inflation within the
target band, but that prospect now looks less likely. That was also the judgement we were coming to at our last OCR
review in July, albeit for somewhat different reasons.
"We will continue to monitor global markets and the local economy, and assess the inflation outlook. For now, the
prudent response is to pause, and to watch and wait," Dr Carr concluded.
Ulf Schoefisch, Chief Economist, New Zealand