Wheeler leaves OCR unchanged

Graeme Wheeler says says inflation remains below the bank's 1 to 3 per cent target range. Photo / Mark Mitchell

Economists say low interest rates likely for some time yet.

The Reserve Bank kept its official cash rate on hold but economists said it was only a matter of time before the bank resumed its easing bias, which means low interest rates will be around for some time yet.

The bank opted to leave its official cash rate (OCR) unchanged at 2.75 per cent, which was in line with market expectations, but said further reduction in the rate "seemed likely".

Economists differed over when the next cut would occur, with some picking December and others opting for early next year, but the expectation was that there would be at least one more cut to build on the last three that have occurred since June.

In a departure from its recent statements, the bank did not try to talk the value of the New Zealand dollar down.

Instead, it directly linked the exchange rate to interest rates, saying a higher New Zealand dollar would require a lower interest rate path than would otherwise be the case.

Reserve Bank Governor Graeme Wheeler said inflation remained below the bank's 1 to 3 per cent target range, reflecting a combination of earlier strength in the New Zealand dollar and the 60 per cent fall in world oil prices since mid-2014.

Annual CPI inflation was expected to return well within the target range by early 2016, as the effects of earlier petrol price falls dropped out of the CPI calculation and in response to the fall in the exchange rate since April, he said.

"However, the exchange rate has been moving higher since September, which could, if sustained, dampen tradeable sector activity and medium-term inflation," he said. "This would require a lower interest rate path than would otherwise be the case," he said.

Annual inflation was just 0.4 per cent in the September year - well below 2 per cent mid-point of the Reserve Bank's mandated 1 to 3 per cent. The last time inflation was near the mid-point was in 2011.

The challenge for the Reserve Bank lies not in keeping inflation low, but in restoring it back to more normal levels, and some economists don't think the bank has done enough to achieve that.

"I'm not sure whether the path that they are articulating is sufficient to achieve 2 per cent [inflation] on average, over the medium term," Westpac chief economist Dominick Stephens said.

Westpac was not alone on that score. "Over 2016 we still see some risk that the Reserve Bank cuts the OCR further," ASB Bank chief economist Nick Tuffley said. "We remain wary that a 2.5 per cent official cash rate will not be low enough to sustain inflation as high as 2 per cent," he said.

The Reserve Bank, once again, warned about the perils of the Auckland housing market, and the risks that it posed to the country's financial stability.

ANZ expects a rate cut in March. "Our base case remains that one further OCR cut will be delivered next year [March] and the risk profile is for more beyond that," the bank said.

The Bank of New Zealand said the Reserve Bank was a "reluctant cutter" given its ongoing concern about the Auckland housing market.

"But we see it as likely the bank keeps the OCR at its 2.50 per cent low for a prolonged period.

"We see it as unlikely the Reserve Bank will raise the OCR again before 2017," the BNZ said.

By this time, the BNZ expects to see CPI inflation back to within the Reserve Bank's target range.

"Borrowers can expect to enjoy historically low floating rates for some time yet," BNZ said.

The Reserve Bank's statement followed a more upbeat assessment about the US and world economies from the US Federal Reserve, which also kept its rates on hold but left the door open for a hike in December.

Rate and risks

• Official Cash Rate unchanged at 2.75 per cent

• House price inflation in Auckland remains strong, posing a financial stability risk.

• Further reduction in the OCR seems likely.