Shadow board favours on-hold OCR call

Reserve Bank Governor Graeme Wheeler is due to announce whether or not the Reserve Bank will change the Official Cash Rate on Thursday. Photo: Mark Mitchell.

NZIER's shadow monetary policy board favours, by a narrow margin, an on-hold decision when the Reserve Bank reviews the official cash rate tomorrow.

The board is a panel of nine economists and business leaders the New Zealand Institute of Economic Research asks to parcel out 100 point across possible interest rates to indicate what they think is the most appropriate OCR setting.

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There is 53 per cent support for leaving the OCR at 3.5 per cent and 40 per cent support for a cut.

"The shadow board suggests that if the OCR is not cut this week, then such a move is not far away," NZIER principal economist Kirdan Lees said.

"The outlook for economic growth no longer looks quite so robust," Lees said.

"Dairy prices continue to slide, driving down demand in much of rural New Zealand."

Meanwhile the annual inflation rate is almost zero.

"The inflation outlook is much different to a year ago when the Reserve Bank hiked the OCR 100 basis points. Not only are the prices of imported goods falling, prices for domestically made goods and services are subdued."

The counter-argument related to Auckland's soaring housing market, Lees said.

The Reserve Bank was not responsible for the rate of growth in house prices, although it had a role to play in ensuring financial stability, which explained its recent policy announcements targeting speculative investment in Auckland.

Three of the nine board members favour leaving the OCR on hold, three rate it as 50 per cent proposition, and three argue for a cut.

Among the latter is ANZ chief economist Cameron Bagrie.

"With growth moderating, economic risks such as a low dairy payout apparent, core inflation already low, and growing evidence there is an unexplained element to low inflation outcomes, the path of least regret looks to be a lower OCR as opposed to a flat-lined one. The Reserve Bank needs to be ahead of the curve not behind it," he said.

Bank of New Zealand head of research Stephen Toplis said the macro-economic data argued for the Reserve Bank to stay on hold, for now at least.

"But the case for a cut is building and there is a very real chance that the Reserve Bank will be bullied into easing by the threat that that New Zealand dollar will bounce if they do not." Westpac chief economist Dominick Stephens argues that changing the OCR now would be out of keeping with the central bank's normal behaviour.

"Every series of OCR changes since 2005, except the emergency cut following the 2011 earthquake, has been preceded by a blunt signal consisting of a sloping 90-day interest rate forecast and a comment in a press release along the lines of '...we are likely to..' or '...we expect to..' reduce/increase the OCR. No such signal has been given on this occasion'."

Stephens does not believe the inflation outlook has changed dramatically since April, when the bank first articulated its conditional easing bias.

"Downside data developments have been largely offset by the falling exchange rate."