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No change to OCR: What RB said today

Thursday, May 11th 2017, 9:00AM

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.

Global economic growth has increased and become more broad-based over recent months. However, major challenges remain with on-going surplus capacity and extensive political uncertainty.

Stronger global demand has helped to raise commodity prices over the past year, which has led to some increase in headline inflation across New Zealand’s trading partners. However, the level of core inflation has generally remained low. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has fallen by around 5 percent since February, partly in response to global developments and reduced interest rate differentials. This is encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector.

GDP growth in the second half of 2016 was weaker than expected. Nevertheless, the growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity.

House price inflation has moderated further, especially in Auckland. The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions. This moderation is projected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand.

The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices. These effects are temporary and may lead to some variability in headline inflation over the year ahead. Non-tradables and wage inflation remain moderate but are expected to increase gradually. This will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.

Developments since the February Monetary Policy Statement on balance are considered to be neutral for the stance of monetary policy.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.

Comments from our readers

On 11 May 2017 at 9:55 am AFA Muggins said:

Could someone please explain to me what value the OCR has, now that the banks completely ignore it and move interest rates independent of it? In the last week, most of the banks have raised mortgage rates. As it has no bearing on interest rates at all, why does the Reserve Bank even figure in the news with this obviously defunct mechanism? I quote from the RBNZ website: "The Reserve Bank uses monetary policy to maintain price stability as defined in the Policy Targets Agreement (PTA)..... The Bank implements monetary policy by setting the Official Cash Rate (OCR), which is reviewed eight times a year." Perhaps the RBNZ needs to recognise that the banks control this, not the RBNZ. As the banks are raising debt interest rates, my prediction is that the RBNZ will shortly raise the OCR, to match.

On 12 May 2017 at 11:26 am doomben said:

Draw a chart of the OCR versus 90 day bank bills - they are extremely close (although whether the RBNZ sets rates or follows the market is certainly an open discussion). Draw a chart of the OCR v long term bonds or swap rates. There is far less correlation. Upshot the RBNZ can affect short term bank funding costs but has much less impact on long term bank funding costs. Since 30 June 2016, the OCR has fallen -50bp. But the US Govt 10 year bond rate has increased +70bp and the NZ 10 year Govt bond rate +70bp. What has happened to bank funding costs? Depends how much they fund short v long term. My guess is unless they are funding at the very short end only, their funding costs are rising, so they are passing it on. And we also now have the Aust bank levy to pay - it will be passed on!

On 12 May 2017 at 3:31 pm AFA Muggins said:

doomben, my comments were somewhat tongue in cheek. This article may interest you, and the comments at the bottom (which are not me)

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