NZIER’s Shadow Board recommends keeping the OCR on hold amidst a soft inflation environment and uncertainty over the new Government

07 February 2018

NZIER’s Monetary Policy Shadow Board continues to recommend the Reserve Bank leave the Official Cash Rate on hold this Thursday at 1.75 percent. Businesses are pessimistic about the effects of new Government policies. Along with softer than expected inflation, Board members indicated the Reserve Bank should remain cautious as to when it starts to lift the OCR.

“Businesses have become more downbeat about the economy since the new Government took office. Although this pessimism is not reflected in expected demand in their own business, it still suggests the Reserve Bank should allow more time to assess these recent developments before lifting interest rates” said Christina Leung, Principal Economist at NZIER.

“The Shadow Board continues to see a mild tightening bias as appropriate, but with the recent December 2017 CPI indicating a softer than expected inflation environment, there is no urgency to lift the OCR.”

Figure 1 NZIER’s Shadow Board again recommends that the Reserve Bank remains on hold with small tightening bias

Source: NZIER Monetary Policy Shadow Board

Figure 2 Individual participants’ recommended rate settings – 1 February 2018

Source: NZIER Monetary Policy Shadow Board

Table 1 Participant comments 

Participant comments are always optional and can be limited to 60 words.

Carolyn Luey We think the Reserve Bank should keep the cash rate steady. Inflation is not currently an issue, with a softening housing market easing concerns. However, strong international indicators and domestic wage increases point to pressure in the medium term, so it would be prudent for businesses to cater for rate hikes late this year or early next year.
Arthur Grimes There is no imminent need to raise interest rates but a path to normalisation of the rate will need to begin in the foreseeable future if future economic and financial cycles are to remain moderate.
Dominick Stephens No comment.
Kirk Hope No comment.
Viv Hall Trend projections for growth and CPI inflation continue to be tricky, due to domestic uncertainties and primarily global temporary factors. But key influences on non-tradable inflation remain sufficiently subdued for me to continue recommending no change to the OCR and to reduce marginally my tightening bias.
Stephen Toplis Inflation will stay sub 2.0% for a while yet obviating the need for any pre-emptive move from the central bank any time soon. Nonetheless, capacity constraints in the general economy, in the labour market in particular, and financial stability issues still argue for a tightening bias.
Prasannai Gai No comment.
Jeremy Couchman Continued uncertainty surrounding government policy, falling business confidence, and a surprise drop in inflation mean there is little need for the RBNZ to adjust policy settings at present. However, we expect the RBNZ will begin hiking interest rates from late 2018 as inflation quickly strengthens due to on-going domestic capacity pressures, and a more robust global economic outlook.
Kerry Gupwell The holiday period means that uncertainty still prevails over the details and impact of government policies. Caution seems to be the operative word, if not tinged with pessimism about the economic outlook for businesses. Given this environment we believe there should be no change to the current OCR.

About the NZIER Monetary Policy Shadow Board
NZIER’s Monetary Policy Shadow Board is independent of the Reserve Bank of New Zealand. Individuals’ views are their own, not those of their respective organisations. The next Shadow Board release will be Tuesday 20 March 2018, ahead of the RBNZ’s Monetary Policy Statement. Past releases are available from the NZIER website:

Shadow Board participants share out 100 points across possible interest rates to indicate what they believe is the most appropriate Official Cash Rate setting for the economy. Combined, these scores form a Shadow Board view ahead of each monetary policy decision.

Participants show where they think interest rates should be, not what they believe will happen.

The NZIER Monetary Policy Shadow Board aims to:

  • encourage informed debate on each interest rate decision
  • help inform how a Board structure might operate
  • explore how Board members could use probabilities to express uncertainty.

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