NZIER reacts to RBNZ March Monetary Policy Statement, media release - March 2016

10 March 2016

New Zealand Institute of Economic Research (Inc)
Media release 10 March 2016

For immediate release

Reserve Bank surprises us with a 25bp cut to OCR

We expected the OCR to remain on hold across 2016. Today the Reserve Bank proved us wrong – it cut the OCR by 25 basis points.

The Reserve Bank’s cut to 2.25% was based on a deteriorating global outlook, a higher than expected Kiwi dollar and lower inflation expectations.  

Our own view was centred on two key factors: our forecasts of continued momentum in the New Zealand economy pointing to economic growth of 2.5 to 3.0% for the next few years; and the weight we attached to the Reserve Bank’s view on financial stability risks from asset prices and the Auckland housing market in particular.

In hindsight we took too much from Governor Wheeler’s speech in February that highlighted the many factors besides consumer price inflation, including asset prices, the Reserve Bank is required to take into account under its Policy Targets Agreement.

Our key takeaway from today’s decision is the Reserve Bank remains more heavily focussed on headline CPI and inflation expectations than we anticipated. Conversely it appears less concerned with asset prices and financial stability than we expected.  

Another cut likely; April makes more sense than June

The Reserve Bank has indicated another cut is likely, with its 90-day interest rate projection implying this move will occur in the second half of this year. Today’s cut has revealed the Reserve Bank’s preferences in balancing up its concerns about CPI inflation, inflation expectations and asset prices, and on balance the Reserve Bank thinks current conditions justify easing.

Given these preferences, we see little point in the Reserve Bank waiting until the second half of the year to follow up with another rate cut. If the aim is to support a lift in CPI inflation, we now expect another OCR cut in either the April or June meeting, with April slightly more likely.

We will continue to monitor the flow of data and both inflation and inflation expectations to update our view on the likely timing of interest rate moves.

Our latest Monetary Policy Shadow Board recommendation, released prior to today's Monetary Policy Statement, can be read here.

For further information please contact:
Christina Leung, Senior Economist & Head of Membership Services, 021 992 985

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