Reserve Bank of New Zealand Retains Interest Rates Amid Signs Of Economic Developments

In August 2019, the Reserve Bank of New Zealand reduced the Official Cash Rate (OCR) to 1.0 per cent, which was half-a-percentage point cut, with the aim to meet its employment and inflation objectives. Later in September, the OCR was kept untouched, as the earlier Monetary Policy Statement did not necessitate a significant alter to the monetary policy outlook.

On 13 November 2019, disregarding bank forecasts, New Zealand’s Central Bank’s Monetary Policy Committee surprised the country and snubbed the rumors of a probable cash rate cut, by maintaining the OCR at 1.0 per cent, unchanged. Defying expectations of a cut, the Bank’s decision was made at the back of its belief of signs that the domestic economy will stop slowing and that inflation objectives will be met. However, the Bank left the door open for more monetary stimulus, if required.

What could have triggered the decision which was at odds with the majority of economists? Let’s find out!

Why Is NZ’s OCR Unchanged?

The answer to the above has been simply put across by the Central Bank- The economic developments in the country (since August 2019) do not necessitate an alter to the already stimulatory monetary setting currently. The Monetary Policy Committee agreed that present economic developments had been balancing for the monetary policy outlook. The reduction in the OCR has been spreading across New Zealand since a year now but will take time to show its full effect.

Moreover, a lift in economic growth during 2020 is expected from the easing of monetary policy and a stronger fiscal stimulus. The increase in non tradable inflation and wages is a consequence of monetary stimulus transmitting through the economy and administrative prices.

The long-term inflation expectations are secured at the ~2 per cent target mid-point. The market rates of inflation prospects have soared from their latest lows. In this regard, the Committee believes that low global interest rates would persist amid declining neutral interest rates, low inflation and uncertainty around policy.

The accommodative monetary policy is vital to meet the employment objectives and address inflation in an economy where the CPI is under the 2 per cent target mid-point (though it is within the 1 to 3 per cent target range) and employment is close to its maximum sustainable level.

Optimistically, the recent monetary stimulus was supporting the medium-term growth projections, with decline in retail lending rates and lower exchange rate supporting the outlook for consumption, broad investment and the overall economy.

New Zealand’s Recent Economic Developments

After the rates were left unchanged, a section of capital economists believe that the Central Bank seems too optimistic about the prospects for growth in New Zealand. But what do the economic figures reveal? Let’s browse through:

• Economic growth continued to slow in mid-2019 indicating soft household spending and weak business investment;
• Trading-partner growth has slowed, though the export commodity prices have been robust, underpinning a positive term of trade;
• The New Zealand dollar exchange rate has been lower, offsetting the weaker global economic environment;
• The Domestic economic activity is expected to increase during 2020, driven by low interest rates, higher wage growth, and increased government spending and investment;
• Rising capacity pressures are projected to promote a pick-up in business investment.

For New Zealand’s inflation to reach the middle of the target range and employment to remains around its maximum sustainable level, The Central Bank will have to maintain low levels of interest rates.

Reserve Bank’s Monetary Policy Statement November 2019

With the interest rate and OCR retained at its current level to support employment and inflation consistent with its policy objectives, the Central Bank notified that:

• Inflation and employment are close to target, with CPI at 1.5 per cent. The labor market remains tight, with employment near its maximum sustainable level, depicting slow growth in line with the lower GDP and population growth (unemployment rate is low at 4.2 per cent);
• Since 2016, the Economic growth has been slowing and is likely to slow through 2019, as Business investment and household spending have been soft. Over 2019, the OCR has been reduced to help offset slowdown in economic momentum. Consequently, Borrowing costs have declined, Low interest rates encourage firms to invest more and the NZD has reduced against other currencies, making exports more competitive with increased demand.
• Global economic conditions weakened further in the past three months, amid geopolitical tensions and uncertainty around trade policies. Long-term interest rates are at historically low levels in developed economies. This is to be maintained by the central banks to sustain their economies.
• Higher capacity pressure and economic activity will gradually lift the CPI back to the 2 per cent target mid-point.

What’s Next?

According to industry experts, the Reserve Bank of New Zealand now needs to focus on targeting maximum sustainable employment, which has triggered the labor figures. It also needs to keep a watch over the low interest rates prevailing globally, that will drive future decisions. Monitoring economic developments amid subdued growth will be integral to any fiscal and monetary moves.

Even though the Bank remains open to an anticipated February cut, housing market conditions are likely to improve, though the global financial and economic situation could worsen.

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