NZIER’s Shadow Board sees little urgency for rate increase

20 June 2017

New Zealand Institute of Economic Research (Inc)
Media release
For release 10am Tuesday 20 June 2017

NZIER’s Monetary Policy Shadow Board’s recommendation to the Reserve Bank is broadly unchanged from the previous meeting in May. The Shadow Board again recommends the Reserve Bank leave the Official Cash Rate on hold this Thursday at 1.75 percent, with a tightening bias.

“The New Zealand economic outlook remains positive, and annual inflation lifted to 2.2 percent for the year to March. While higher food and fuel prices have largely driven the recent pick-up in inflation, and may be transitory only, there are also signs that underlying inflation is continuing to lift.” said Christina Leung, Senior Economist at NZIER.

“However, any further lift in inflation is expected to be gradual, and downside risks remain due to heightened geopolitical risks from offshore. These factors suggest that while interest rates should go up, for now there is little urgency. NZIER continues to expect the Reserve Bank to begin lifting the OCR from the middle of 2018.”

The Shadow Board’s average recommended interest rate remained steady at 1.82 percent.

Figure 1 NZIER’s Shadow Board retains a tightening bias in its recommendation that the Reserve Bank remains on hold

Source: NZIER Monetary Policy Shadow Board

Figure 2 Individual participants’ recommended rate settings – 12 June 2017

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 believe the RBNZ should hold the OCR at 1.75 percent, but should be clear about future tightening. We see surging commodity prices pushing heat into the economy, with inflation trending up, leading to building expectations that forecast increases will be brought forward. It would be good to get a clear steer on where things are heading.
Arthur Grimes Interest rates will have to start rising at some stage over the next year as resource constraints intensify and affect inflation. It will be important that the Bank does not get behind the curve by leaving rates at very low levels for too long. Otherwise the result will be an overshoot in the other direction.
Michael Gordon Growth is middling and underlying inflation is only gradually returning to target. The RBNZ can stand back and let low interest rates continue to do their work.
Kirk Hope No comment.
Viv Hall After taking due account of recent temporary influences on CPI inflation, I'm recommending no change to the OCR but shading upwards my probability of an OCR increase. Timing for the latter is not yet determinable with any degree of certainty.
Stephen Toplis While a strict interpretation of the current PTA would argue for rates being held at current record low levels for an extended period of time, rising capacity constraints and potential future instability generated by maintaining the current settings would argue for higher rates sooner.
Dave Taylor No comment.
Prasanna Gai No comment.
Zoe Wallis The economic landscape continues to justify a ‘wait and see’ approach. With the NZ economy growing at around trend and the NZ TWI rising again, inflation pressure is expected to build gradually. Global financial markets have calmly absorbed a variety of shocks to date, but that doesn’t mean the risks have disappeared. 

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 August, 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, 021 992 985