The widely expected OCR cut was not the most significant aspect of September’s Reserve Bank Monetary Policy Statement. The far more significant aspect was the somewhat jaw-dropping downgrade in the economic forecast picture that the Reserve Bank now paints.
Three months ago the RB expected GDP growth in the coming year (to March 2016) to average 3.2%. It now expects this to be 2.1%. Consequently, an unemployment rate of 6.1% is expected for March next year, compared to the 5.3% expected just 3 months ago.
The RB paints the slowing in the domestic economy as indeed dramatic, with consumer spending revised down from 3.4% to 2.5%. Worryingly, non-housing investment spending has been downgraded from a previously expected 6.4% surge to now be in decline by 0.8%. Clearly, the RB sees the dive in confidence accompanying the dairy price slump and volatile global markets as having a serious impact on short-term activity.
Nevertheless, the exchange rate adjustment is expected underpin stronger exports, with the net trade (exports minus imports) contribution turning significantly positive (2.1%) – compared to the expected -2.1% three months ago.
These revisions reflect the heightened level of uncertainty, driven in part by global market jitters. The picture suggests a further 25-points OCR cut early next year, which fully reverses the premature, ill-advised and mistaken hikes imposed last year.
The RB’s forecast picture is now similar to that presented in our 04 August 2015 Briefing.
Given that the RB picture now suggests below potential growth to 2017 and headline CPI remaining below 2% over the forecast horizon, the chances of further OCR cuts through to 2016 are relatively high.
We continue to expect the OCR to reach 2% during the first-half of 2016. Further details of our forecast will be in our September Birds Eye View, which will be released on 25 September.