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RBNZ's Orr keeps OCR at 1.75% in first outing, says next move could be up or down

Thursday 10th May 2018

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New Reserve Bank governor Adrian Orr kept the official cash rate at 1.75 percent and said the direction of the next move is equally balanced and could be up or down, although its forecasts continue to point to eventual rate increases. The New Zealand dollar fell. 


Orr said economic growth and employment remain near their sustainable levels but inflation is still below the 2 percent mid-point of the central bank's target band. As a result, it expects to keep the OCR at "this expansionary level for a considerable period of time" as "this is the best contribution we can make, at this moment, to maximising sustainable employment and maintaining low and stable inflation."


According to the monetary policy statement, ongoing spending and investment by both households and government is expected to support economic growth and employment demand and business investment should also increase due to emerging capacity constraints. "The emerging capacity constraints are projected to see New Zealand's consumer price inflation gradually rise to our 2 percent annual target," Orr said. 


Today's statement marks the first time the central bank must officially take employment into account after Finance Minister Grant Robertson and Orr signed a new policy targets agreement adding the goal of "supporting maximum levels of sustainable employment within the economy" to the existing goal of price stability.


The Reserve Bank interprets the term ‘maximum sustainable employment’ (MSE) to mean the highest utilisation of labour resources that can be maintained over time, it said. It noted, however, the Reserve Bank does not have a specific numerical target for employment, unlike for inflation. Rather, it monitors a wide range of labour market indicators to form a holistic assessment of whether the economy is currently operating at MSE.


According to the monetary policy statement, employment is currently within a broad range of indicators of the maximum sustainable level. Spare capacity in the labour market appears to have been absorbed, although estimates of capacity are uncertain, it said. 


Also, over the projection period "employment growth is expected to continue to outpace growth in the labour force, leading to further tightening in the labour market. This labour market tightening is reflected in a slight fall in the unemployment rate over the next three years," it said. 


The New Zealand dollar fell to 69.37 US cents as at 9.40am from 69.83 US cents just prior to the release. 


All 15 economists polled by Bloomberg had expected rates to stay on hold. Given ongoing weak inflation, the central bank lowered its forecasts for inflation and the level of the New Zealand dollar on a trade-weighted index basis over the projected period. The TWI was recently at 72.88, well below the 75 average the RBNZ had previously projected for the current quarter. The TWI is now forecast to average 74.1 in the final two quarters of this year. 


The Reserve Bank's forecast also shows the OCR rising to 1.9 percent in December 2019 versus a prior forecast of June. A full rate increase is still signalled by March 2020 when the benchmark rate is forecast to be 2 percent. 


"The risks around the OCR projection are broadly balanced," it said, adding that "monetary policy may need to adjust as new data or information become available, or as our understanding of the economy develops."


ASB Bank chief economist Nick Tuffley said the bank was "expressly neutral" and that while the details of the statement were similar to the previous document, "the RBNZ substantially changed the way in which it lays out the monetary policy statement, as it flagged earlier in the week. The result: greater clarity and a swiftly digestible message."


According to Tuffley, "the presentation is now being done in a way that makes the RBNZ’s messages much clearer and less vulnerable to misinterpretation." 



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