AMP Capital’s view on Official Cash Rate decision

8 June 2006

AMP Capital’s view on Official Cash Rate decision

“The accompanying text and economic projections within the June Monetary Policy Statement (MPS) again reiterated that the RBNZ did not expect to raise the OCR further in this cycle, but there is no scope for an easing this year. Indeed, compared to the March MPS, the June MPS indicated a little more resolve in holding the OCR steady into next year,” said AMP Capital Investors’ Fixed Interest Strategist, Leo Krippner.

“The economic themes within the June MPS were that recent economic activity has been weaker than the RBNZ projected in the March MPS, but the short-term outlook for inflation has worsened. The latter is evident in an upward revision to the inflation projection of around 1.3%, to a peak rate of 3.9% in mid-2007.

About half of the upward revision is attributable to higher petrol prices since the March MPS, and the other half to the weakening of the currency earlier this year. As a good central bank should, the RBNZ stresses that it is 'looking through" the surprise spike in inflation, and so will not mechanically raise the OCR just because inflation is above the 1 to 3% target range and is likely to stay there until next year.

However, the RBNZ does want to ensure that inflation at those levels does not lead to ‘second round’ effects through raising inflation expectations, therefore leading people and businesses to demand higher wages and prices going forward,” Mr Krippner said.

“The reaction from financial markets has been to push interest rates of all maturities higher. This anticipates the OCR being at 7.25% for a little longer than previously expected, and also the higher inflation projections. The currency has moved higher, as higher interest rates are more attractive to foreign investors.

“Our view on the OCR remains essentially unchanged. That is, we still expect the OCR is likely to be cut either in December, or early next year. However, a December cut would now require some softer economic and inflation data within the next few months. If that does not occur, the RBNZ will be happier to wait until next year before cautiously lowering the OCR. As always though, the RBNZ's outlook (and our own) is subject to change as the data evolves,” said Mr Krippner.

ENDS

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