The Reserve Bank (RB) left the OCR unchanged at 2.5 percent today (14th March) suggesting that it will stay there “through to the end of the year”.
However, hedging all bets, the RB suggestion is dependent upon neither upside or downside risks occurring.
The upsides noted were: further global turmoil less likely; improved financial market sentiment; Canterbury rebuild gaining momentum; increasing residential investment; and higher business and consumer confidence.
The downsides were: overvalued New Zealand dollar; drought; and ongoing fiscal consolidation.
Interestingly, the governor stated that the New Zealand dollar was “overvalued”, undermining profitability in export and import competing industries. That he made this call is courageous and suggests that there may be a role for the RB in supporting the ‘real’ value of the New Zealand dollar, whatever that might be?
So back to the risks. Our view is that the downside is more likely, particularly with the worsening drought conditions, which are pretty much affecting the entire North Island. Nor are we as confident that the risks around global growth are receding, which suggests the New Zealand dollar will stay high. Slow global growth, reduced stock levels due to drought, and a lower return with the high dollar are likely to test the RB’s growth forecasts of between 2 and 3 percent.
The full Monetary Policy Statement is available on the RB website here.