NZIER’s Shadow Board recommends the RBNZ hold the OCR steady

20 September 2016

NZIER’s Monetary Policy Shadow Board recommends the Reserve Bank keeps the Official Cash Rate on hold this Thursday at 2 percent. While the Shadow Board had a wide range of views, on balance there is still an underlying preference for a cut in the rate.

“We are seeing solid momentum in the New Zealand economy, driven by strong domestic demand. But continued weak inflation and a strengthening New Zealand dollar are unhelpful for the Reserve Bank in achieving its 2 percent mid-point inflation target.” said Peter Wilson, Principal Economist at NZIER.

“The Shadow Board recommends the Reserve Bank keeps the OCR on hold at 2 percent this Thursday, but suggests there is also scope for further easing. The tension between weak inflation and rapid house price acceleration remains very taut, with the higher New Zealand dollar also adding to the Reserve Bank’s dilemma. Nonetheless, the Reserve Bank’s primary focus on inflation means further easing is likely.”

The Shadow Board’s average recommended interest rate fell from 2.08 percent in August to 1.95 percent in September.

Figure 1 NZIER's Shadow Board recommends the Reserve Bank remains on hold but with an easing bias

Source: NZIER Monetary Policy Shadow Board

Figure 2 Individual particpants' recommended rate settings - 14 September 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 Whilst GDP figures will be expected to show good growth according to the latest MYOB Business Monitor many of regional businesses are still challenged by the effects of low commodity prices.  So with cash low still the number one issue facing business, a reduction in rates would be welcome relief. 
Arthur Grimes Inflation is low, house prices are rising fast, growth is robust, while international conditions vary from quite strong (US) to quite weak (Europe). Given these contrasting forces that are affecting current and future inflation, a wait-and-see approach to interest rate setting (with no bias for future changes) is warranted.
Michael Gordon The latest developments – higher dairy prices and a higher NZ dollar – seem roughly balanced in their impact on the appropriate policy setting.
Kirk Hope No comment.
Viv Hall CPI inflation remains low and stable within a 0-3% range. Further OCR cuts are unlikely to assist rapid achievement of the 2% PTA mid-point target, are likely at best to have only a temporary downwards effect on the exchange rate, and could provide a further boost to house price inflation which would outweigh modest dampening effects from enhanced macroprudential measures. So, no recommendation for an OCR change.
Stephen Toplis We think there is a 70% chance that rates should be at or above current levels. That said we stress that these assumptions are based on the core premise that New Zealand can cope with sub-target inflation for an extended period. This is probably not the view that the RBNZ holds.
Dave Taylor No comment.
Prasanna Gai No comment.
Zoe Wallis Inflation remains conspicuous by its absence but growth is solid and expected to improve further. A higher NZD is creating further downward pressure on tradables inflation and risks sending inflation expectations lower still. A clear easing remains appropriate to combat weak inflation pressure, although there isn’t a rush to ease in September.

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 8 November 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:

Peter Wilson, Principal Economist & Head of Auckland Business 021 870 928