RBNZ: Pace Of Easing Picks Up To “Avoid Unnecessary Instability”

The RBNZ increased its pace of easing by cutting the OCR 50bp to 4.75% today, as expected, after starting the easing cycle with 25bp in August. The MPC felt that “restraint” could be lessened as inflation is “within” the 1-3% target range and approaching the mid-point. It seemed to opt for an increase in the pace of easing to “avoid unnecessary instability” in the economy and markets. It noted that policy is still restrictive though.

• The discussion was around whether to cut rates 25bp or 50bp but the MPC unanimously decided on the latter as that was “most consistent” with its mandate to maintain “low and stable inflation”. This suggests that it may have been concerned that 25bp increments may not be enough to stop inflation falling towards the bottom of the band.
• In August, the MPC said that further easing would be dependent on its confidence that “pricing behaviour” would be consistent with low inflation and anchored expectations. This conditionality was dropped this month and future easing is now dependent on the “assessment of the economy” signalling that it is currently confident that inflation is sustainably within the band.
• The MPC recognised the weak inflation outcomes of the QSBO survey but also mentioned its own enquiries which “suggest that weak demand is restricting the pass through” of higher costs to customers. As a result “price-setting behaviour is now more consistent” with the “inflation remit”, the RBNZ’s goal. There are still risks though to both the upside and downside.
• The RBNZ said that growth is weak, excess capacity is rising and “employment conditions continue to soften” due to weak consumption and investment but also low productivity growth. Slowing housing, government spending and immigration are going to weigh on demand going forward.