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Repeats Story Initially Transmitted at 22:03 GMT Jun 27/18:03 EST Jun 27
By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of New Zealand has left the key message
that the official cash rate could go up or down but underneath that message is a
growing risk that the rate could go lower, MNI understands.
     This is because the RBNZ has clearly made a distinction between the level
of OCR and the degree of monetary accommodation in the economy. The RBNZ's
intention is to leave the monetary policy setting at the current expansionary
level. But if financial conditions tighten and make the current setting less
expansionary, the RBNZ would cut the OCR to restore it to around the current
     That is why there appears to be some inconsistency in the first and last
line of the OCR statement published Thursday. At closer look, however, they are
entirely consistent.
     The first line, "The Official Cash Rate (OCR) will remain at 1.75 percent
for now" is a reference to the level of the OCR currently and that the rate
would remain at this level "for now"
     And the last line refers to the degree of policy accommodation, and here
the RBNZ is pledging to keep it expansionary for a considerable period which is
at least until late 2019 as indicated in the May Monetary Policy Statement.
     "The best contribution we can make to maximising sustainable employment,
and maintaining low and stable inflation, is to ensure the OCR is at an
expansionary level for a considerable period."
     Interestingly, none of this means there's a change in the way RBNZ is
operating monetary policy. Indeed the RBNZ has always taken monetary policy
setting into account while deciding the level of OCR.
     Risk that financial conditions could tighten have increased since the May
policy statement. This would mainly happen via a rise in mortgage rates and if
this materializes, it would mean that the key risk highlighted by the RBNZ in
May has come to pass.
     In May, the RBNZ said if financial conditions were to tighten abruptly,
global economic activity would be adversely affected which would reduce world
demand and lower the price of New Zealand's exports.
     "Long-term interest rates would also increase, leading to higher funding
costs for New Zealand banks and higher mortgage rates," the RBNZ said. 
     "While the New Zealand dollar TWI would depreciate, the increase in
mortgage rates and lower export prices would dampen consumption and business
investment. In this scenario, the Bank would need to lower the OCR to support
the economy and meet its inflation and employment objectives," the RBNZ said in
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: