by Miriam Bell
Reserve Bank Governor Graeme Wheeler defended the Bank’s stance on interest rates and inflation targeting in a speech to the Otago Chamber of Commerce.
In the speech, he said Reserve Bank decisions involved continually balancing a range of risks, uncertainties, and trade-offs.
But the Bank’s present judgement is that the current interest rate track, which involves an expected 35 basis points of further interest rate cuts, balances a number of economic risks while generating the required CPI inflation increase, he said.
There was only limited reaction to the speech in financial markets, although interest rate markets are pricing in an 85% chance of a 25 basis point cut to the OCR in November.
Wheeler’s speech also reinforced the OCR cut expectations of some bank economists.
ASB economist Kim Mundy said the speech highlighted the complex backdrop of current monetary policy decisions, while pushing back at the free advice the Reserve Bank has been receiving recently.
Essentially, the Reserve Bank reiterated its stance from the August Monetary Policy Statement, she said.
“It doesn’t feel behind the curve, and will move in a measured way – ie: it will wait until the November MPS before cutting again, barring a significant change in the outlook.”
While another 35 basis points of cuts were signalled, Wheeler also noted a number of issues that the Reserve Bank is grappling with which are likely to shape its thinking going forward, Mundy said.
“Our view is the Reserve Bank will cut once more in November, but there is a substantial risk of a further cut in early 2017.
“The NZD risks continuing to defy the Reserve Bank’s expectations and inflation expectations remain a risk, although there some potential offset comes from the nascent recovery in dairy prices.”
Westpac economist Sarah Drought agreed that an OCR cut in November is on the cards.
She said the speech defended the status quo, in terms of Reserve Bank thinking – reiterating the August MPS and offering up no new information on monetary policy.
“The Reserve Bank’s forecasts, which assume a further 35 basis point reduction in the OCR from the current level of 2%, signal an OCR half way between 1.75% and 1.5%.
“They didn’t give away anything in terms of bias, downplaying both the ideas that interest rates should remain unchanged, or that rates should be cut rapidly.”
For this reason, Westpac continues to expect a 25 basis point reduction in the OCR in November, and thinks there is a risk of a further cut beyond this.
Drought said macro-prudential policy was not a focus of the speech.
But the Reserve Bank acknowledged that interest rate reductions could add to pressure on the housing market, she said.
“This is partly balanced against changes in macro prudential policy (which will be tightened this year, with further policy changes on the cards for next year).”
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