Reserve Bank likely to confirm no rate hike in this week’s OCR review

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The Reserve Bank will probably change its language in this week’s review of the official cash rate after a senior bank official last week said a hike in interest rates isn’t being considered at present.

Governor Graeme Wheeler is expected to keep the OCR unchanged at 3.5 percent on Thursday but may drop the language he used in the Monetary Policy Statement on March 12 that “future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.”

Last week, assistant governor John McDermott gave a speech saying the bank isn’t considering any increase in rates and, before considering a hike, it would need to be confident that increased capacity utilisation and labour market tightness were likely to stoke “a substantial increase” in inflation.

The consumers price index fell 0.3 percent in the first quarter for an annual rate of just 0.1 percent, the smallest annual movement since the year to September 1999, figures last week showed. Much of the weakness reflects falling fuel prices, which the bank can ‘look through’, and that will reduce headline inflation “substantially” in 2015 before dropping out by the start of next year, assuming crude oil doesn’t decline further, Mr McDermott said. Labour market data for the March quarter is released on May 6.

The OCR review will probably “be more dovish than the press release that accompanied the March MPS press release,” Dominick Stephens, chief economist at Westpac Banking Corp, said in his OCR preview. “Although the central OCR outlook is still ‘on hold’, we suspect that the RBNZ will find some way to introduce more asymmetry into its language than it has used in previous missives. At the very least, any reference to the OCR going ‘up’ will be purged.”

Governor Graeme Wheeler is in a difficult position in terms of his main monetary policy instrument, the OCR, because, while inflation is near zero and the kiwi dollar higher than he projected on a trade-weighted basis, cutting interest rates could prompt banks to reduce mortgage rates, inflaming an already overheated Auckland housing market. The TWI was recently at 79.07 versus the bank’s forecast for the second quarter average of 76.7.

In a separate speech this month, deputy governor Grant Spencer noted that annual house price inflation in Auckland reached almost 17 percent last month and in the face of record migration the city had a shortfall of between 15,000 and 20,000 properties to meet population growth.

Mr Spencer said there were "practical difficulties" in attempting to use migration policy to slow housing market in Auckland and with inflation so tame, there was little scope for monetary policy to provide assistance.

Traders are betting on 25 basis points of cuts to the OCR over the next 12 months, based on the overnight index swap curve. McDermott said last week “evidence of weakening demand and domestic inflationary pressures would prompt us to consider lowering interest rates."

There are positives, with economic growth underpinned by high net immigration, strong employment and construction activity, and robust household spending, he said.

The central bank’s official projection, for the 90-day bank bill rate, shows it flatlining through until March 2017. Annual inflation is seen recovering by 2016, according to the last MPS forecasts but doesn’t get above 1.7 percent through the bank’s forecasting horizon, below the 2 percent mid-point of its target range.

“Despite our resolutely bullish views on the housing market and economic growth, we ascribe roughly a 40 percent chance to OCR cuts occurring this year,” said Westpac’s Mr Stephens.

(BusinessDesk)