MNI RBNZ WATCH: RBNZ Leaves Rates On Hold, Downgrades OCR Peak

The Reserve Bank of New Zealand left its Overnight Cash Rate on hold at 5.5% on Wednesday in a decision largely anticipated by markets, and downgraded its peak OCR call in its Monetary Policy Statement by10bp to 5.6% by the third quarter.

RBNZ-dated Overnight Index Swap rates had priced in a 30% chance of a hike at Wednesday’s meeting, with cuts to follow soon after. OIS pricing closed 5-21 basis points softer.The Reserve has held the OCR at 5.5% since May. (See MNI RBNZ WATCH: MPC To Consider Pause And Keep Hawkish Stance)

Referring to market pricing for cuts later in the year soon after a tightening cycle peak, Governor Adrian Orr noted Monetary Policy Committee members had not discussed a cut during deliberations. “On the table was a hold or do we need to do more,” he said. “It was a very strong consensus that the OCR is sufficient” and that the economy has behaved as anticipated.

“Markets have been very volatile, trying to pick what would be the peak of official policy rates and, of course, if they feel we're at the peak, when is the next move down? And so you are seeing a lot of volatility in global interest rate markets, we’ve seen here in New Zealand, fed through from expectations the U.S. Federal Reserve may start cutting rates and guess what that means,” Orr told reporters, following the MPC’s unanimous decision.

Policy rates will not fall without a high level of confidence on inflation, he added. “And that really is an important starting point for our work as well,” he added. “As soon as people start to think [we] might have done enough, the next guessing game becomes, ‘well, when are you going to start cutting.’”

HOLD FACTORS

Orr pointed to falling inflation expectations, particularly among the business community.

RBNZ data released on Feb 22 showed household one-year CPI expectations had fallen to 5.1% in Q4 from 5.5% in Q3. However, both the mean two- and five-year expectations increased to 3.6% from 3.2% and 2.1% respectively.

Orr said the Reserve's thinking on net-inward migration continued to adapt, noting a higher population had helped lower labour costs and achieve declines in inflation without the projected rise in unemployment.

"And so we've been able to have a lower cost to disinflation to date, a softer landing," he added. "We have to look at aggregate demand. It is going to be a function of how many people, aggregate supply and the productive capacity of the economy. Migration will play on both sides."

SOFT LANDING AHEAD

Orr noted the accompanying MPS presented an upbeat assessment of the New Zealand economy. "Our OCR is not projected to be rising subject to all of the uncertainties. Economic growth is actually picking up, we're talking about 1% economic growth this calendar year again, rising back to our potential growth rates of around 3% for the following two years. It's a soft landing scenario that we have in here. But it does mean subdued demand."

The RBNZ MPC next meets April 10.