Brian Fallow: Reserve Bank does right thing

Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell

It is a relief the Reserve Bank has moved to a neutral stance in its statement this morning, saying it expects to keep the official cash rate on hold (at 3.5 per cent) "for some time" and dropping the language in its December statement that "some further increase in the OCR is expected to be required at a later stage".

The Reserve Bank's statement came hard on the heels of one from the Federal Reserve which reiterated verbatim its guidance that it "judges it can be patient in beginning to normalise the stance of monetary policy" - that is, to raise US interest rates.

Read more on this morning's announcement here.

Meanwhile the European Central Bank and the Bank of Japan are now between them printing money on almost the same scale the Fed did when it was doing quantitative easing.

In a world awash with cheap money looking for a home even faintly hawkish sounding noises from the Reserve Bank would invite a torrential flow into New Zealand dollar denominated securities, undoing the modest softening of the exchange rate which has occurred recently.

This morning's statement included the familiar comment - perhaps more hope than anticipation - that "we expect to see a further significant depreciation".

Equally, for it to seem to validate emerging expectations of an OCR cut would be tantamount to dumping a monsoon bucketful of petrol on Auckland's overheated housing market.

The bank acknowledges a significantly weaker outlook for inflation than it saw even six weeks ago: "Headline annual inflation is expected to be below the target band through 2015, and could become negative for a period before moving back towards 2 per cent, albeit more gradually than previously anticipated."

But it also makes the point that one of the reasons for that, the collapse in global oil prices, will also have positive effects on economic activity, by increasing households' purchasing power and lowering the cost of doing business.

And that at a time when "economic growth in New Zealand is above 3 percent, supported by rising construction activity and household incomes."

The outlook for activity is not all positive, however, with a reduced dairy payout, the risk of drought, fiscal tightening by the Government and an exchange rate which remains too high.

The upshot is a statement in which the bank treads the fine line, neither endorsing expectations of even a distant further rise in interest rates nor of a reversal of direction either.