Monetary Conditions

Again, No change to the Official Cash Rate

Friday March 13, 2015 Masrur Alam Khan

The Reserve Bank has kept the Official Cash Rate (OCR) unchanged at 3.5 percent during its last OCR announcement (12 March) despite forecasts indicating that CPI inflation will fall to zero for the March 2015 quarter. 


In its media statement the RBNZ signalled that strong economic growth (3.5 percent in the year to September), falling global oil prices, low interest rates throughout the globe, uncertainty in the global economy (particularly falling economic growth in China and recent changes to monetary policy in the US) and a high exchange rate as key influences to its decision.


The arguments that they have provided try to not only justify their decision but also explain the unique situation of solid economic growth accompanied by low inflation currently faced by the New Zealand economy.  It is worth noting that the booming housing market, particularly in Auckland and Christchurch, solid employment growth and record migration also weighed in to their decision.   


It is very interesting to see that the RBNZ seems to have considered other measures aside from domestic inflation for basing its monetary policy decision for the last two quarters of 2014 as headline inflation has remained below the target range of 2-3 percent. 


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In fact, solely relying on inflation data would have prompted a decrease in the cash rate as general CPI has remained below 1 percent in the year to December 2014.  Furthermore, year-on-year producer prices have also fallen in the last quarter.  This suggests that both supply cost and consumer demand has fallen.


What is more compelling is that the OCR has been raised 4 times (from 2.5 to 3.5), despite headline inflation remaining below the 2 percent midpoint target since 2011.


Also, RBNZ has raised its concerns over the strong Kiwi dollar (currently trading at 72.78 US cents with the Trade Weighted Index at 77.04), which it believes to be “unjustifiably high”.  Therefore inflation will remain below target for the rest of this year due to the high dollar subduing import prices, coupled with lower oil prices.  If inflation does not settle at the RBNZ medium term target of around 2 percent, the RBNZ will have to consider further rate cuts.