NZIER’s Shadow Board sees no OCR change as appropriate but highlights downside risks

07 March 2016

NZIER’s Monetary Policy Shadow Board recommends the Reserve Bank holds the interest rate at 2.50 percent in its Official Cash Rate announcement this Thursday.

“The Reserve Bank is having to balance increased uncertainty over the global outlook and a weak inflation environment against solid momentum in the New Zealand economy and continued strength in asset prices. The recent lift in the NZD has effectively tightened monetary policy settings and will pose challenges for exporters.” said Christina Leung, Senior Economist at NZIER.

“The Shadow Board sees increased downside risks to interest rates in light of developments since January. The scope for higher rates has also reduced significantly since January. For now though, the Shadow Board still considers 2.5% as the most appropriate OCR”.

The Shadow Board’s average recommended interest rate fell from 2.50 percent to 2.43 percent.

Figure 1 NZIER's Shadow Board recommends no change in OCR on Thursday

Source: NZIER Monetary Policy Shadow Board

Figure 2 Individual participants' recommended rate settings - 7 March 2016

Source: NZIER Monetary Policy Shadow Board

Table 1 Participant comments

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

Cameron Bagrie Rates are probably about right when I weigh up low headline inflation, receding inflation expectations and risks in the dairy sector vs signs of rising core inflation, an economy going ok and financial stability risks. Forget about trying to get the NZD down when the economy is printing reasonable numbers and other countries are moving more into negative interest rate territory.  The wildcards are now the global scene (China) and signs of a structural shift upwards in funding costs. It seems inevitable they will eventually drag the OCR lower.
Scott Gardiner Despite challenges facing certain sectors and the fact the we may be reaching the top of the building cycle in Canterbury, we are unlikely to see a change in the rate this week.  SME’s feeling pressure around pricing and cashflow which means many are spending time with accountants understanding near future cashflows.
Arthur Grimes A close eye has to be kept on domestic economy reactions to weakness in China and elsewhere. If domestic inflation does not pick up, then an OCR cut could become warranted but the central bank has to be wary about reacting pro-cyclically by cutting just as inflationary pressures rise. A wait and see approach is still appropriate for now.
Dominick Stephens No comment.
Kirk Hope No comment.
Viv Hall The global economic outlook and projected monetary policy settings for key countries reflect continuing uncertainties. Yet NZ's economic growth remains remarkably healthy. The relative contributions of temporary and more permanent influences on headline CPI inflation are not sufficiently clear, so further patience is appropriate for the short-term. But should trend inflation become unduly subdued, monetary and macroprudential policies will need some policy mates. 
Stephen Toplis Traditionalists would argue that inflation forecasts are so low the RBNZ has no choice but to cut rates but the costs of doing so, especially to financial stability, outweigh the benefits at this juncture. Moreover, it is highly doubtful that lowering the cash rate would lift inflation anyway.
Dave Taylor No comment.
Prasanna Gai No comment.

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 26 April 2016, ahead of the RBNZ’s OCR Review. 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