RBNZ likely to leave OCR on hold, shift to strictly neutral monetary policy outlook: Westpac Research

The Reserve Bank of New Zealand (RBNZ) is expected to leave the OCR on hold but to shift to a strictly neutral monetary policy outlook, according to the latest report from Westpac Research.

In its last missive, the Reserve Bank said it expected to keep the OCR on hold through 2019 and into 2020. However, it dropped the phrase that “the next move in the OCR could be up or down,” and forecast very gradual OCR increases from mid-2020.

The central bank may further underscore its change of view with something like “We expect to keep the OCR on hold over the whole of 2019 and 2020, longer than previously projected.”

There will be three key reasons for the RBNZ’s change of stance. First and foremost, the exchange rate is higher than previously projected (mainly because the US Federal Reserve has gone off the idea of lifting official interest rates, meaning a weaker US dollar). A higher exchange rate means less tradables inflation for New Zealand.

Second, the New Zealand economy has clearly lost momentum in late-2018, to a greater extent than the RBNZ expected. GDP growth for the September quarter printed at just 0.3 percent, and the latest data indicates that the December quarter was similar.

And third, Stats NZ has dramatically revised its estimates of net migration, with the effect that the population is smaller, and growing more slowly, than previously thought.

Meanwhile, there have been a couple of offsetting positive developments – global dairy prices have unexpectedly risen 19 percent since late November, and non-tradables inflation was stronger than expected in December. But these are not enough to completely counter the negatives.