NZIER’s Shadow Board recommends the RBNZ cut the OCR

09 August 2016

By Christina Leung

New Zealand Institute of Economic Research (Inc)

Media release

For immediate release Tuesday 9 August 2016

There is some division amongst NZIER’s Monetary Policy Shadow Board over what the Reserve Bank should do with its Official Cash Rate this Thursday, but on balance the Board recommends a 25bp cut.

“The tension between weak generalised inflation and rampant house price inflation has become even tighter, against a backdrop of decent momentum in the New Zealand economy. The high New Zealand dollar is also adding to the pressure for the Reserve Bank to cut interest rates.” said Christina Leung, Senior Economist at NZIER.

“The Shadow Board, on balance, recommends the Reserve Bank cut the OCR to 2 percent on Thursday, but there is still a reasonable constituency for leaving interest rates on hold. The continued broad-based strengthening of the housing market across New Zealand poses a risk to financial stability, but the Reserve Bank is looking to address this through further macro-prudential measures.

With the primary focus of its Policy Targets Agreement on lifting inflation back to its 2% mid-point target, the Reserve Bank is likely to see scope to cut interest rates.”

The Shadow Board’s average recommended interest rate fell from 2.22 percent in June to 2.08 percent in August.

Figure 1 NZIER’s Shadow Board recommends the Reserve Bank cut the OCR by 0.25% on Thursday

Source:  NZIER Monetary Policy Shadow Board

Figure 2 Individual participants’ recommended rate settings – 3 August 2016

Source:  NZIER Monetary Policy Shadow Board

Table 1 Participant comments

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

Scott Gardiner Small business facing challenges particularly in the regions and the dairy challenges mean spending has been significantly reduced. It is necessary to find ways stimulate business outside of relying on strong housing market. We are seeing SMEs wanting to work more with accountants to invest in capital expenditure.
Arthur Grimes No comment.
Michael Gordon The stronger NZ dollar will frustrate the RBNZ, but the outlook for inflation still seems to be for an uncomfortably slow return to target rather than a continued undershoot. Further easing is appropriate, but not dramatically so.
Kirk Hope No comment.
Viv Hall Given NZ's current and foreseeable economic conditions and policy settings, the recommendation I drafted on Tuesday 2 August was for no change to the OCR of 2.25%. However, the subsequent RBA decision to lower their cash rate by 25 basis points to 1.50% has created a 75bp trans-Tasman difference. Reluctantly, therefore, I now recommend a 25bp (but not a 50bp) cut to NZ's OCR.
Stephen Toplis Current interest rates are entirely inappropriate. Either they have to be much higher to choke off the housing market or much lower to materially affect inflation. The PTA says the latter should get prominence, hence our leaning in that direction. But the truth of the matter is that interest rates are not the problem nor the solution at the moment.
Dave Taylor No comment.
Prasanna Gai No comment.
Zoe Wallis From an inflation targeting viewpoint, a weaker global growth outlook, a high NZD, and soft inflation pressure (particularly outside of construction/housing-related sectors) argue in favour of further rate cuts. While economic growth is solid for now, the factors above add downside risk to the local outlook over the medium-term.

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 September 2016, 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, Senior Economist & Head of Membership Services
christina.leung, 021 992 985