Liam Dann: Reserve Bank covers all bases with OCR balancing act


The Reserve Bank covered all the bases today with a Monetary Policy Review that acknowledged some positive signs of economic recovery while reminding that the risk of further shocks remains very real.

The Official Cash Rate was left unchanged at 0.25 per cent as expected and the market was largely unmoved by the continuation of the Bank’s “wait and see” approach.

The statement from Governor Adrian Orr and the Monetary Committee acknowledged a global recovery was underway but retained a dovish tone by emphasising that “it was prepared to lower the OCR if required”.

Orr and the Monetary Policy Committee said the global economic outlook had continued to improve since February.

“However, economic uncertainty remains elevated and divergences in economic growth both within and between countries are significant,” he said.

New Zealand’s commodity export prices continued to benefit from robust global demand.

But he noted “economic activity in New Zealand slowed over the summer months following the earlier rebound in domestic spending”.

“Short-term data continues to be highly variable as a result of the economic impacts of Covid-19.”

There was no reason for the RBNZ to deviate its “wait and see” and “least regrets” strategy, said ANZ chief economist Sharon Zollner.

The market was already on board with the RBNZ’s message that tightening remains a distant prospect, she said.

“In short, the New Zealand economy is evolving broadly in line with RBNZ expectations, and there’s time to see how more recent developments impact things.”

The RBNZ acknowledged the two big changes on the domestic policy front since the February statement – the Government’s housing policy changes and the upcoming opening of the trans-Tasman bubble.

But it avoided building any assumptions about the potential outcomes into its forecasts.

“The Government’s new housing policies are likely to dampen house price growth, but the extent of the effect and implications for consumer price inflation, and employment will take time to be observed,” the Committee said.

On the planned transtasman bubble it noted that the move “should support incomes and employment in the tourism sector both in New Zealand and Australia”.

“However, the net impact on overall spending will be determined by the two-way nature of this travel.”

With regard to a new remit which requires the Bank to consider housing affordability in its decisions the Committee did discuss the broader distributional impacts of lower interest rates.

“Members noted that lower interest rates make it easier to service mortgages, while also putting upward pressure on house prices, making the required deposit to buy a house larger,” the statement said,

“Stimulatory monetary policy also supports employment and incomes over the medium term, which improves the ability to save for a deposit or service a mortgage and broader economic wellbeing.”

Most economists expect to see the OCR stay on hold until at least the second half of 2022 as the Bank looks through short-term inflation risk driven by supply restrictions caused by the pandemic.

The Monetary Policy Committee said it was prepared to maintain “current stimulatory monetary settings” until it was confident that consumer price inflation would be sustained at the 2 per cent per annum target midpoint, and that employment was at or above its maximum sustainable level.

It noted that there will be periods “during which inflation will be above the 2 per cent target per annum midpoint”.

The Large Scale Asset Purchase programme (buying up to $100b of government bonds) was also left unchanged.

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