A selection of economist reaction to this morning's decision by the Reserve Bank to cut the Official Cash Rate to 2.5 per cent.
Nick Tuffley, ASB chief economist:
The content of the statement delivered no surprises. The Reserve Bank cited the outlook for the world economy had deteriorated, monetary conditions had tightened (i.e. longer term interest rates and the exchange rate were higher than expected) and business confidence remains weak.
Of the
choice of actions the Reserve Bank had to attempt to reverse a recent tightening of monetary conditions, it chose the one we thought most likely. By both cutting 50bp and committing to keep the OCR low into the "latter part of 2010" the Reserve Bank is aiming to shape interest rates expectations held by businesses, households and market participants alike. Wholesale rates have declined (though are still well above pre March Monetary Policy Statement levels).
The message for borrowers remains that there is no real hurry to fix rates since the door on very low long-term rates slammed firmly shut a month ago. There may be some scope in the future for lower long-term rates over time, depending on the lasting impact of the Reserve Bank's current and future actions and whether the lift in global long-term rates also abates. But certainly there is no hurry at present to fix.
The choice of fixing vs. floating will remain a trade-off between the certainty of fixed rates and the low debt-servicing costs in the immediate future of floating rates. The Reserve Bank has today given a little more certainty over how long the benefits of floating rate debt will be sustained.
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Darren Gibbs, Deutsche Bank chief economist:
Today the Reserve Bank announced a 50bp cut the OCR to 2.5 per cent - the lowest level since the OCR regime was introduced in 1999. This was in line with the expectations of most bank economists, whereas we and market pricing had favoured a 25bp reduction.
We certainly can't fault the clarity of today's message as reflected in the final paragraph of the statement. Needless to say, we do have some concerns with the content of the message.
Only time will tell whether the latest policy easing - and prospective further reductions in the OCR - prove to be a step or two too far.
So where to from here? Needless to say much will depend on how the recent outbreak of swine flu evolves. For now we are assuming that the outbreak will not substantially alter the global or domestic macro outlook (the validity of this assumption will be tested over coming weeks).
We think that the Reserve Bank will most likely retain the OCR at 2.5 per cent at the June Monetary Policy Statement meeting whilst maintaining a strong easing bias. And for now we are happy to retain our view that the current level of the OCR will prove the low-point for this cycle.
That said, clearly we can't rule out another 50bps of easing over the next few meetings, especially if the Reserve Bank remains focused on the most backward looking data (we are certain that next weeks labour market reports will make unpleasant reading).
Looking further ahead, if the economic outlook pans out much as we expect, we think that Dr Bollard will regret committing to maintain the OCR at 2.5 per cent or lower until the latter part of 2010, much as he doubtless regrets his comment last December that the current recession may already have ended or indeed might yet be revised away.
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Khoon Goh, Senior Markets Economist, ANZ National:
In so far as central bank communication is concerned, today's RBNZ message is clear cut: if you are a borrower, don't panic and rush to fix.
The key paragraph was where the Governor said "We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters."
This is a step further from his April 1 statement when he said "we are projecting interest rates to remain at relatively low levels for an extended period."
With the medium-term inflation outlook very favourable and the economy still weak, with any recovery tepid at best, the RBNZ felt a need to provide more policy stimulus and importantly, keep conditions stimulatory for a long time.
The sentence about keeping rates low until the latter part of next year is a leaf out of recent offshore central bank communications of late. The Bank of Canada and Sweden's Riksbank also committed to keeping their policy rates low until the end of Q2 2010 and early 2011 respectively.
But the big difference is that the RBNZ did not put any conditionality around their policy outlook commitment, feeling sufficiently comfortable that inflation will be tamed for some time. In this respect, today's statement is as dovish as you can get.
The Governor is open to further cuts to the OCR in the coming quarters, and we expect another 25bp cut in June. In our view, the ultimate endgame for the OCR will be dependent on what sort of adjustment we see in the currency over the coming months.
In terms of data releases we see the March quarter employment (or unemployment) report as strongly validating a further OCR move in June.
Beyond that close attention will need to be paid to leading indicators. If the influential NZIER Quarterly Survey of Business Opinion (due early July) follows the lead of yesterday's National Bank Business Outlook survey and recovers (off historical lows), a pause and 2.25 per cent trough is likely.
In our view, today's assessment and commentary is about as clear as central bank communication could possibly be. Policy is attempting to remove the temptation for the market (via pricing in rate hikes in 2010) to pre-empt the recovery. Term wholesale rates should be lower. It's a timely reminder that the NZD is not a one way ticket higher, and equally a signal to borrowers not to panic.
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Bernard Doyle, Goldman Sachs JBWere strategist:
Bottom Line: The dovish end of the options open to the Reserve Bank. Key
phrase: "We expect to keep the OCR at or below the current level through
until the latter part of 2010. The OCR could still move modestly lower
over the coming quarters."
Of the options open to the Reserve Bank, the most dovish was taken, particularly after yesterday's bounce in business confidence. Not only did the Reserve Bank cut 50bps, but it suggested a long period of low rates, while not ruling out further cuts: "We consider it appropriate to provide further policy stimulus to the economy. We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters."
Despite the turn in leading indicators, the Reserve Bank is clearly not
convinced this signals a sharp turn in the cycle - something we concur
with: "However, the scale of the global financial crisis and domestic
adjustments underway are such that it is likely to be some time before
economic activity returns to robust and healthy levels."
The Reserve Bank is also clearly perturbed by both the sharp move in
long term rates in March, and the pop in the NZD, identifying both as
disinflationary forces that caused an "unwarranted tightening in
financial conditions via both higher long-term interest rates and a
stronger exchange rate than expected."
Overall, we see the cut and accompanying comments as appropriate
- particularly in conditioning investors and households for a muted
recovery if and when it arrives. However given the turn in leading
indicators here and abroad, we doubt further cuts will be required. We
would also be surprised if the OCR is still at 2.50 per cent by the end of next year.
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Robin Clements,UBS New Zealand senior economist:
Notably, domestic 'green shoots' were given little attention, and appropriately so. Despite improvements in business and consumer confidence (and signs that housing may be reaching a trough), the levels of both remain well below historical averages i.e. as the Reserve Bank notes 'Business sentiment is low, investment has been curtailed and employment reduced'.
However, the more important comments in the release were the forward guidance on rates i.e. 'We expect to keep the OCR at or below the current level through until the latter part of 2010' and that 'The OCR could still move modestly lower over the coming quarters'.
This clear and decisive message is in line with our view (updated last week) that today's cut will be followed by a couple of 25bp moves, taking the OCR to a low of 2.0 per cent (Reserve Bank governor Bollard repeated that a zero policy rate should not be anticipated). Moreover, we expect this 2.0 per cent OCR rate to prevail until the middle of next year and to only move above the current level in Q3 2010.
What is the Official Cash Rate? - Reserve Bank fact sheet.
See the history of the Official Cash Rate here.
