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29/6/2018 — General
No change to OCR
By Simon Hartley

Unsurprisingly the official cash rate (OCR) remained unchanged yesterday at 1.75%, but sentiments are now speculating on the possibility of cut next year, instead of the expected rise.

While most economists have been bullish this year on a rise, somewhere from mid-2019 to the end of the year by the Reserve Bank, more dovish sentiments were expressed yesterday.

Reserve Bank Governor Adrian Orr said interest-driving OCR would remain at 1.75% for now.

“However, we are well positioned to manage change in either direction, up or down, as necessary,” he said in first OCR decision yesterday.

Orr said global economic growth was expected to support demand for NZ's

products and services, and global inflationary pressure was also expected to be higher; albeit modest.

ASB chief economist Nick Tuffley said in keeping the OCR at 1.75% and with a “neutral bias,” Orr was giving the Reserve Bank more wriggle room on just how long the rate would remain at 1.75%.

“We now expect the first OCR increase in November 2019, and the risk of a cut (instead) has grown recently,” Tuffley said.

While there was no urgency for the OCR to be shifted, Tuffley said the risk bias had shifted a little, pushing out his expectations of the tightening cycle to begin not in August next year, but in November.

“We also see growing risk that the next move may be a cut, rather than a hike.”

Infometrics economist Mieke Welvaert believed a hike next year was more likely than a cut, but did not completely rule out the latter entirely.

She said despite The Reserve Bank saying the OCR could go up or down at this point, its projected hikes begin from the September quarter next year.

“The logic behind this view is that global inflationary pressure, along with rising household incomes in New Zealand, will push up price growth,” Ms Welvaert said.

While an OCR cut was “unlikely,” the Reserve Bank's model suggested that a cut was possible.

“The outlook for a higher OCR in 2019 rests on conditions of stronger economic growth and a pick-up in consumer price inflation,” she said.

Inflation has been stubbornly sitting just below 2%, just below the mid-point of the Reserve Bank's target of 1%-3%.

“We think that conditions warranting a hike in the OCR, over a cut, are more probable,'' Ms Welvaert said.

Westpac's chief economist Dominick Stephens said Orr's OCR review was “slightly more dovish” than previous reviews, with the communication style shifting towards emphasising uncertainty.

“We're surprised the Reserve Bank shifted its view on that,” Stephens said of its less bullish stance on the country's economic growth.

He said the Reserve Bank and financial markets had slowly come round to Westpac's long held view that New Zealand's economy would be “slow” this year, and not accelerating.

He reiterated his OCR forecast of a hike in November next year.

Adrian Orr said the international outlook has been tempered slightly by trade tensions in some major economies, and ongoing volatility continued in some emerging market economies.

Domestically, ongoing spending and investment, by both households and the Government was expected to support growth, he said. However, the recent weaker gross domestic product data implied marginally more spare capacity in the economy than was anticipated.

“The Government's projected spending impulse is also slightly lower and later than anticipated,” Orr said.

*Simon Hartley is senior business reporter and assistant chief reporter for the Otago Daily Times.

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Reserve Bank Governor Adrian Orr. Photo: Radio NZ.