Nicola Willis discusses Reserve Bank’s OCR decision
A retail industry group says keeping the official cash rate (OCR) at 2.75 percent will be a mixed bag for many shops.
The Reserve Bank surprised economists on Wednesday when it narrowly voted not to increase the OCR, which immediately caused the New Zealand dollar to drop 1.3 percent, landing at 56.1 cents against the US dollar.
Retail NZ chief executive Carolyn Young said that would tighten margins for stores that imported their products from overseas.
“In New Zealand we don’t manufacture a lot, so if you think about the retail environment anything including groceries, apparel, footwear, DIY stores, a lot of the products are imported from overseas, books come in from overseas, stationery, all of those items are going to be at a higher price because of the exchange rate, and so that has an impact right now,” she said.
Different sectors within retail would be impacted differently, she said.
“If you’re a car dealer, for example, if you’re placing orders, because a lot of car purchases now are done on order rather than having stock on hand, would you want to hold off a couple of days and see what happens to the exchange rate?” she asked.
“Most retailers will have their stock in, that’ll be ordered and paid for now, but if you’re ordering your autumn stock then that could have a further impact.”
But she said a stable OCR could give customers more confidence heading into the holiday season.
“From a consumer perspective, they’ll be thinking ‘okay well that’s good, I know my mortgage rate isn’t going to increase’, or ‘my rent should stay stable’, so that could create confidence for consumers,” she said.
“Consumer confidence is, of course, directly impactful into a positive outcome for retailers, so there are some upsides, potentially, to not increasing interest rates right now.”
That confidence may be short lived, with many economists now predicting an OCR increase in early December.
Kelvin Davidson.
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“We’ll probably get an OCR increase at the next meeting, so it’s probably only a temporary reprieve,” Cotality’s chief property economist Kelvin Davidson said.
The good news, Davidson said, was that fixed mortgage rates were unlikely to spike, because they had already been adjusted under the assumption the OCR would increase in October.
“Financial markets are forward looking, fixed mortgage rates tend to reflect that future so they move ahead of the OCR anyway, and so this possible further tightening we’ve got to go has probably already, to an extent, been priced in, so I don’t think mortgage rates are going to spike in the next little while,” he said.
Avoiding big surprises
Former Reserve Bank economist on surprise OCR decision
Former Reserve Bank economist Michael Riddell said the “overwhelming weight of market opinion was expecting a move”.
“When you’re the Reserve Bank, while you never want to be driven entirely by what the market’s expecting, you also want to avoid big surprises like that.”
He said the bank appeared “gun shy” when it came to tackling persistent inflation.
“I was just looking back at some statements that were made by the Reserve Bank back in 2021 when inflation first became a problem, and they were talking about trying to get core inflation – strip out oil prices – back to 2 percent. Five years on, we’re still not there.
“And there was nothing in yesterday’s statement as to how they think that once the oil shock passes… inflation is going to drop back to that 2 percent.”
He said because the decision not to move the OCR caused a drop in the value of the dollar, higher import prices would result in more inflation.
“I think yesterday’s statement, even if it was the right decision – and I’m not sure it was – it wasn’t particularly compellingly made. There was a lot of emphasis, for example, on the fact that the AI bubble might burst overseas. Well, it might, and it probably will at some point, but you react to that when it happens. What you need to be focusing on now is actual inflation pressures here in New Zealand.”
National finance spokesperson Nicola Willis said the government’s financial discipline was partly the reason for the OCR staying where it is. Riddell said that was “just pure politicising”, with the only references to fiscal policy in the Reserve Bank’s statement being to foreign fiscal policy, not domestic.
“The three Budgets this Government’s put down so far have not cut the deficit very much at all… What’s going on here is simply about the state of the economy and pricing pressures. Fiscal policy hasn’t made much difference to that at all.”