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UPDATE: 'Pigeon-like' RBNZ still firmly on hold despite increasing inflationary pressure

Thursday 8th November 2018

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The central bank says that inflation pressures are rising in New Zealand but it continues to reiterate rates will be on hold until 2020 and a cut remains possible. 

In his three monthly monetary policy statement this morning, Reserve Bank governor Adrian Orr kept the official cash rate at 1.75 percent as widely expected and said the central bank expects to keep it at this level into 2020. While the statement pared back language around a possible rate cut, he told a press conference in Wellington that it's still on the table.

"No. We are not taking a rate cut off the table," he said. "I think it would be pointless to do that, to remove an option. What we are saying is we are very data dependent, data-driven around how our projections unfold. The risks to the downside remain," he said.

Regarding why he removed the reference to the next move being up or down in today's statement he said: "I'd like to think we don't need to be anchored to exactly the same words each time."  He also said that phrase could be reintroduced although "it is too soon to tell." 

The central bank's forecasts now see annual inflation hitting the 2 percent target in December this year - largely due to impact of rising fuel prices - and remaining there for several quarters before dipping back down.

Importantly, however, it hits 2.0 percent in June 2020 and moves higher over the remainder of the forecast period, which runs to Dec 2021, when it is seen at 2.2 percent. It previously forecast inflation hitting 2.0 percent in March 2021. 

Despite this, its forecasts for the cash rate were unchanged. It still sees the OCR at 1.9 percent in September 2020 and a rate hike is still signaled by December 2020 when the benchmark rate is forecast to be 2 percent. 

When asked why, Orr said: "We have to remember core inflation is still below the mid-point of our target. We are here to do our job." 

Westpac Bank chief economist Dominick Stephens said the stance may indicate the bank is less bound to the 2 percent midpoint of the inflation target band. "The RBNZ has chosen to take the run of recent strong data in the form of higher inflation, not a higher OCR forecast. The RBNZ is choosing higher inflation, rather than a higher OCR," he said. 

 Annette Beacher, chief Asia-Pacific macro strategist for TD Securities, said the governor remains in "wait, watching and worry mode" as downside risks to the growth outlook remain.  She is not, however, buying the forecasts. "Despite the clear message that OIS should not price in rate hikes before 2020, we remain of the view that the record low cash rate has a much shorter shelf life, and look for +25bp in Dec quarter 2019," she said. 

KiwiBank economists characterised the RBNZ's position as "pigeon-like", meaning it was neither hawkish nor dovish - the cliches by which central banks' positions are described as either inclined to raise or cut interest rates respectively.

The market is also more hawkish, despite Orr's comments, it nows sees a 54 percent chance of a rate hike in March 2020 versus 28 percent prior to today's statement. 

(BusinessDesk)

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