Reserve Bank leaves official cash rate unchanged at 2.75 pct in shock decisionRBNZ votes 4-3 to hold OCR, Governor Breman joins two external members and another RBNZ official to holdRBNZ expects inflation to hit 4.4 percent because of fuelMonetary committee balances recovery against inflation pressureRBNZ leaves door open for future hikes depending on dataNZ dollar slumps nearly a cent against US dollar
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The Reserve Bank (RBNZ) shocked by holding its benchmark interest rate unchanged in a split decision but left the door open for further rate rises to counter stronger inflation.
The official cash rate (OCR) was left at 2.75 percent, defying overwhelming expectations of a rise by financial markets and economists.
The central bank’s Monetary Policy Committee (MPC) acknowledged stronger inflation pressures, economic uncertainty, and restated its determination to get inflation back to the desired 2 percent target.
“Annual inflation is expected to increase to 4.4 percent in the December quarter, largely reflecting current futures prices for fuel. Near-term inflation forecasts are uncertain given volatility in prices for oil and refined fuels,” it said in a statement.
However, the MPC could not agree on how serious the near term threat was.
“All Committee members agreed on the overall outlook for inflation. However, members differed in how much weight they placed on various risks and the timing of the monetary policy response.”
Governor Anna Breman sided with the three external members of the MPC to keep the cash rate on hold, while the other three members – all RBNZ senior officials – voted to raise the cash rate.
It had signalled in the September monetary statement that a pause was likely at this meeting, as it assessed the impact of its previous rate rises and the outlook for the economy.
“The Committee agreed that tighter monetary policy is likely to be required but remains conditional on the economic outlook.”
The decision raises the prospect of a rate hike in the December monetary policy statement.
The New Zealand dollar plunged the best part of a cent against the US dollar to just under 56 cents.
Mixed and confused outlook
The MPC looked to be caught by mixed inflation signals – the obvious and immediate impact of fuel price spikes, but many businesses being unable to pass on some or all of higher costs because of consumer reluctance to buy.
“Subdued growth in household spending is limiting the ability of some firms to pass on higher costs to restore profit margins,” the RBNZ statement said.
“But the longer inflation remains high, the greater the risk of higher costs feeding into inflation expectations and price- and wage-setting behaviour, making inflation more persistent.”
It said the New Zealand economy was showing signs of recovery, but the outlook was uncertain.
“New Zealand’s recovery could be stronger than expected but could also lose momentum if the global environment deteriorates or export strength does not flow through to jobs, incomes and household spending.”
It said the global economic outlook was looking increasingly “fragile”.
The notes on the MPC meeting showed Breman and external member Prasanna Gai were particularly concerned about a rapid change in the global outlook, which might materially affect New Zealand.
Willis claims some credit, warns of opposition party risks
National finance spokesperson Nicola Willis said the outgoing government’s financial discipline was one reason for the low OCR.
“National’s disciplined spending and economic management has helped bring the OCR down from the 5.5 percent Labour left behind.”
“By stopping wasteful spending and getting the books back in order, we’ve eased government pressure on inflation and interest rates.”
Willis warned that a coalition involving Labour, Greens, Te Pāti Māori, and Opportunity would put the economy at risk with greater spending and borrowing.
Economists had universally forecast a 25 basis point rise, and were surprised by the split vote and the tone of the RBNZ statement.
“The Bank’s tone was decidedly dovish, with a considerable amount of the Summary of Meeting dedicated to warning of various risks that could strike the domestic recovery or the global economy,” Infometrics Principal Economist Brad Olsen said.
“In contrast, the inflation concerns were more muted than before or acknowledged to be ‘as expected’.”
The rate rise is coming in December
ANZ chief economist Sharon Zollner called the decision a “close-run thing”.
“Our view is that a 25bp hike today would have been the most prudent course, given the higher outlook for near-term inflation, resilience in activity indicators, the turn higher in Q3 core inflation measures.”
“However, some Committee members felt it was more prudent to watch how developments unfold over the next six weeks before taking action – with an eye on downside risks to global growth, in particular.”
Zollner said a December rate rise now looked the likely next step, and she believed the OCR would still rise to 3.5 percent with further hikes in February and March next year.
ASB and Westpac economists also pencilled in a December rise, and financial markets put a 75 percent chance of that.
One casualty of the surprise decision to hold was the New Zealand dollar, which plunged close to a cent against the US dollar in minutes after the announcement on the reduced interest rate outlook.