Summary
- The central bank downgraded the OCR projection and was seen to be slightly dovish compared to the previous meeting.
- Despite the dovish message, there were some hawkish undertones.
- RBNZ remained optimistic about the economy and is said to focus on the increasing capacity pressures.
- There is scope for the central bank to turn more dovish once new data is taken into account.
RBNZ leaves OCR unchanged, as expected
The Reserve Bank of New Zealand held its monetary policy meeting last week. In its first policy review of 2019, the central bank left the OCR unchanged at 1.75% as widely expected.
“The Official Cash Rate (OCR) remains at 1.75 percent. We expect to keep the OCR at this level through 2019 and 2020. The direction of our next OCR move could be up or down,” the RBNZ’s statement said.
The central bank’s message was seen by the markets to be somewhat dovish but offsetting the dovish language was some upbeat and optimistic views on the economy. The central bank focused on the impact of capital requirements by banks on the OCR rate as being only transitory. It ruled out that the capital requirements would affect the neutral interest rate.
The overall tone of the meeting suggested that the RBNZ did not surprise the markets and the statements were broadly in line with expectations. This also increases the view that the general outlook remains neutral for the remainder of this year.
The central bank projected its OCR to be about 20 basis points lower than its previous forecast. While the central bank said that it sees no change to the OCR at the current levels until 2020, the next move could be a rate hike or a rate cut (depending on assessing the incoming economic data).
Central Bank on economic growth
Details on the monetary policy statement was a bit less dovish than expected. The central bank focused its concerns around the global economy just like most other central banks.
Citing the external factors as risks, the RBNZ, however, remained positive on New Zealand’s growth outlook. It emphasized the importance of the tightening labor market and the emerging capacity pressures. The statement said:
“Despite the weaker global impetus, we expect low-interest rates and government spending to support a pick-up in New Zealand’s GDP growth over 2019. Low-interest rates and continued employment growth should support household spending and business investment. Government spending on infrastructure and housing also supports domestic demand.”
The central bank gave the view that it remained optimistic that growth will pick up in the coming quarters. This should come amid government spending likely to push growth and thus help inflation to rise closer to its mid-rate of the inflation target band.
RBNZ’s assessment out of date
Economists were however quick to point out that the RBNZ’s view was mostly neutral due to the analysis being out of date.
The RBNZ’s Monetary policy statement included the forecast of the December quarter’s GDP growth at 0.8%. However, this would mean that the information did not include the quarterly employment survey which came out weaker than expected.
As a result, economists quickly pointed out that the MPS does not reflect the latest developments in the economy. There is a consensus that the fourth quarter GDP grew just by 0.3%.
The central bank also did not make any revisions despite Statistics NZ revising the estimates on the net migration.
As a result, it is highly likely that the RBNZ’s assessment of the economy will be softer than at the currency meeting as the data will then incorporate the December GDP numbers and also adjust for the employment report as well.
The RBNZ did not make any references to the exchange rate of the NZD.
The next policy meeting from the RBNZ is likely to see the central bank take a more dovish stance. The medium-term inflation expectations showed an unchanged print of 2%.
Following the RBNZ’s meeting, the New Zealand dollar posted strong gains. The currency gained over 1.68% immediately after the RBNZ released its statement.