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OCR steady - economists react

Reaction from economists to today's Reserve Bank decision to keep the OCR at a record low of 2.5 per cent.
The sedate property market is likely to be affected byt ising interest rates - predicted for later this year. Economists now expect the Reserve Bank to lift the Official Cash Rate in September. Photo / Greg Bowker.
The sedate property market is likely to be affected byt ising interest rates - predicted for later this year. Economists now expect the Reserve Bank to lift the Official Cash Rate in September. Photo / Greg Bowker.

Westpac Bank chief economist Dominick Stephens: The Reserve Bank's plan appears to be 50bp worth of hikes over the next couple of meetings, followed by a pause if the exchange rate remains high. However, the statement was highly conditional. If any of the global financial conditions, domestic economy, or exchange rate evolve in surprising ways, the plan will change.

Before today, our OCR call was for a December start date to the hikes. There is now a clear risk that the Reserve Bank will move earlier than that, and we are reviewing our call.

However, we do regard market pricing for almost 50bp of hikes over the next two OCR meetings as excessively certain, given the uncertainty of the world. We remain concerned that the high exchange rate and slowing global growth could reduce the Reserve Bank's current enthusiasm for near-term hikes.

The final paragraph of the statement appeared to warn that the March 2011 50 basis point "insurance cut" may soon be reversed, providing risks around US and European sovereign debt issues recede. There was no clear indication of the timing of these hikes, nor whether the move would come as a single 50bp hike or in two 25bp increments.

ANZ Bank economist Khoon Goh: The Reserve Bank made it clear
that the March insurance cut will be removed soon though subject to some global caveats.

We now see them taking out the insurance cut at the next meeting, and are calling a 50bp hike in September. We see no point in unwinding the insurance cut in multiple steps.

But we think the Reserve Bank will pause thereafter to assess the landscape. The Governor made it clear that the high New Zealand dollar is a concern, which will lessen the need for further increases thereafter.

Bottom line is that the OCR is set to move off emergency settings but still remain stimulatory.

Surprisingly to us, the Reserve Bank is somewhat unconcerned about inflation despite the stronger than expected Q2 CPI print. But the fact that the Reserve Bank asked wage and price setters to focus on underlying inflation, which is below 2.5 per cent, suggests the RBNZ still expect inflation expectations to come down and that the high headline rate will not seep through. Time will tell.


ASB Bank economist Nick Tuffley: Reserve Bank likely to hike 50bp in September then pause.

The Reserve Bank kept the discussion on the growth outlook deliberately brief to avoid confusing the message. The important thing to note is the conditionality of the increase of the OCR on the continuation of the NZ economic recovery and the global economic risks subsiding.

The Reserve Bank acknowledged the stronger economic outlook, and noted the key role the high terms of trade is playing. On this note, the outlook for the global recovery is crucial, and the current risks, particularly stemming from uncertainty in the US, are a concern to the Reserve Bank .

As a result, the removal of the emergency cut is highly conditional on these risks receding. That means the Reserve Bank will be assuming there is little impact on NZ from the US debt ceiling negotiations and a possible US credit rating downgrade.

The discussion on the exchange rate was also pared back. The Reserve Bank was very specific that further increases in the OCR (i.e. beyond the removal of the 50bp insurance cut) were dependent on the level of the exchange rate (the Trade Weighted Index is likely to be the most appropriate measure to consider).

What is apparent is the Reserve Bank wants to take back the March 50bp 'insurance' cut very soon. That suggests a September hike is very likely, and in our view a 50bp is more probable than a 25bp. The Reserve Bank sees "little need for the March 2011 'insurance' cut to remain in place much longer", and our interpretation is that means an imminent move and also reversing the March cut in one hit.

Beyond that we see the RBNZ pausing until January, then resuming steady 25bp OCR increases.

Goldman Sachs NZ Philip Borkin: Given the circumstances, we view today's statement as a communications success. The Reserve Bank acknowledged that the emergency level of the OCR is on borrowed time, but that it would take an amicable solution to some of the difficulties offshore before they would consider hiking. The Reserve Bank also appreciates that the high NZ$ has done some of its work for it.

In a very concise statement, the RBNZ acknowledged the continued improvement in the domestic economy and the elevated level of inflation. But at the same time highlighted the downside risks evident around the globe and the tightening already delivered by the higher NZ$.

Once again, the RBNZ highlighted the improving signs of recovery in the domestic economy, stating that "The economy has grown more strongly than was expected, and it appears that the recovery is getting back on track, supported by a strong terms of trade". Clearly this is signal that the RBNZ will be lifting its GDP forecasts at the September MPS, although this is unsurprising given the recent strength in the domestic dataflow.

...we cannot rule out interest rate hikes (perhaps even 50bp) at the September meeting, although this is not fait accompli. Prudently the Reserve Bank is aware of the risks of tightening into a troubled global backdrop and has remained cautious.

Grant Hassell, head of fixed interest at AMP Capital Investors New Zealand: New Zealand's economy is showing it's incredibly resilient and has bounced back from the earthquake. It feels like Bollard will take back the 50 basis points" of emergency stimulus. "2.5 per cent is too low.

Any future rate hikes will be dependent on where the New Zealand dollar goes, which Bollard said "is acting as a drag on the New Zealand economy," and will "likely to reduce the need for further OCR increases in the short term."

- NZ HERALD ONLINE

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