Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
Another hike for the Official Cash Rate (OCR) now looks less likely - before Christmas at least - with the Reserve Bank taking a cautious tone in its latest Monetary Policy Review today.
But don’t expect rates to start falling any time soon, either.
The Reserve Bank (RBNZ) hasleft the OCR on hold at 5.5 per cent and indicated rates need to stay at “restrictive levels” for longer.
“The committee agreed that interest rates may need to remain at a restrictive level for a more sustained period of time, to ensure annual consumer price inflation returns to the 1 to 3 per cent target range and to support maximum sustainable employment,” the RBNZ said.
Divining meaning from the Reserve Bank’s neutral statement required new levels of mental gymnastics from economists.
While the statement was, if anything, slightly more hawkish than the August Monetary Policy Statement (MPS), it was less hawkish than the market expected, meaning in relative terms it was dovish.
In the language of monetary policy, “hawkish” refers to a more aggressive, anti-inflationary stance and points towards higher rates. “Dovish” suggests a more relaxed attitude to inflation and points to rates being left alone or even cut.
Since the stronger-than-expected GDP growth data last month, markets have been pricing in one more OCR rate hike in November or February.
“We continue to see a 25 basis point rate hike in November at this stage, but this must be a lower probability than previously thought,” said Westpac chief economist Kelly Eckhold.
Third-quarter inflation and labour market data would be key to the probability and size of that rate increase, as would global economic and financial markets developments, Eckhold said.
The RBNZ still seemed to be concerned about the possibility of persistent inflation pressures and that the economy might not weaken as fast as required in the short term, he said.
“There is a near-term risk that activity and inflation do not slow as much as needed. Over the medium term, a greater slowdown in global economic demand, particularly in China, could weigh more on commodity prices and New Zealand export revenue,” the RBNZ said in its release.
The committee agreed that the OCR needs to stay at a restrictive level to ensure that annual consumer price inflation returns to the 1 to 3 per cent target range, and to support maximum sustainable employment.
The committee noted that GDP was stronger than they expected in the first half of 2023. However, the RBNZ retained confidence that the required amount of slowdown will ultimately occur.
“We see this statement as more dovish than our expectations,” Eckhold said.
“We anticipated the RBNZ would craft a statement that broadly endorsed current market pricing for around a 50/50 chance of a 25 basis point rate rise in November. This statement suggests that view was too hawkish. By not communicating any further concern on the inflation outlook means the hurdle for a November tightening remains high.”
BNZ head of research Stephen Toplis agreed that a rate hike this year now looked less likely but he noted the increased risk that rates stay elevated for longer.
“At the margin there is some suggestion the cash rate may need to stay elevated at 5.5 per cent for longer than previously thought but there is no suggestion that the bank is contemplating any move in the cash rate this side of Christmas,” he said.
“Generally speaking, we feel the Reserve Bank is downplaying inflation risks. We had expected the bank to acknowledge specifically that the recent surge in oil prices would push up its near-term inflation projections, which it must surely do, but it didn’t. Instead it said ‘the recent rise in global oil prices could increase domestic costs over coming months, risking headline inflation being higher than expected’.”
ANZ economists highlighted the more hawkish tone (relative to the August statement) but noted the RBNZ leaning towards “high” for longer rather than “higher” for longer.
ANZ senior economist Miles Workman.
Relative to the August statement, ANZ senior economist Miles Workman said: “The signal was on the hawkish side, with the committee agreeing that interest rates may need to remain at a restrictive level for a more sustained period of time.”
“While the door is still open for a hike in November (which was signalled as a possibility in the August MPS projection), the hurdle feels a little more data dependent than previously,” Workman said.
The New Zealand dollar fell in the minutes following the 2pm release. By 2.05 pm, the Kiwi was trading at US58.93c compared with US59.14c just before the announcement.
Markets still see one more OCR hike as coming, pricing in a 50 per cent chance of a rate hike in November, and fully pricing in the hike by May.
