Bollard changes tack on OCR

Reserve Bank governor Alan Bollard changed tack this morning.

As expected, he left the official cash rate at 2.5%.

It was what was missing, rather than what was included, in today's OCR review which is most significant.

As expected, it remains at its historically low level – one which, until now, has been seen as highly stimulatory.

Not any more, it seems.

"It remains appropriate for the OCR to be held at 2.5%," Dr Bollard said today.

Six weeks ago, at his last review, the wording was slightly, but significantly, different.

"It remains appropriate for monetary policy to remain stimulatory, with the OCR being held at 2.5%," he said back at his full monetary policy statement in mid-June.

To put it baldly, the OCR is no longer regarded as stimulatory – and that has implications for the Reserve Bank's next move.

First, it suggests the OCR is going to remain lower for longer, especially when put alongside economic forecasts in the previous statement which said New Zealand's capacity for economic growth is now lower than previously because of high debt levels and the need to rebuild from recent shocks, both economic and geological.

Second, it makes the chances of a further rate cut more likely.

The shift in stance is also likely to see a drop in the New Zealand dollar, which Dr Bollard cited today as one of the constraints on the economy at the moment.

There was no hint about the timing of any change to the OCR, nor whether the next move would be up, or – as some economists and a number of business groups have been urging – down.

Overnight index swap (OIS) markets earlier this week priced in the chances of a rate cut by the end of the year as a little over 10%, but although some economists say the Reserve Bank should cut the rate none of them actually expect this.

Instead, most are forecasting a rise in the first quarter next year, although there has been a shift in recent days towards June or July, and it is likely to change further after today's shift in stance.

Today, Dr Bollard was giving little away. In a particularly short statement, the central bank explicitly stated there is no change to the economic outlook since the last full monetary policy statement six weeks ago.

GDP growth was 1.7% last year and was forecast to rise to just over 3% next year at the last update.

Today's statement confined itself to forecast "economic activity to grow modestly over the next few years".

The bank cites the recent pick-up in housing activity, along with repairs and construction in Christchurch providing a boost to the construction sector.

Offsetting that are two constraints – the high exchange rate and the government's move to rein in the fiscal stimulus of recent years.

The main worries are offshore, not local. "New Zealand's trading partner outlook remains poor, with several Euro-area economies in recession," Dr Bollard said today.

"There remans a limited risk that conditions in the euro area deteriorate very significantly."