The Reserve Bank will most likely keep the Official Cash Rate on hold at 1.75 percent, but the real question is whether it will signal keeping the rate on hold for longer after last week’s disappointing GDP numbers.
On Thursday, when the latest OCR decision is published, all eyes will be on Reserve Bank Governor Adrian Orr’s accompanying press release. Finance Minister Grant Robertson will be paying especially close attention.
Some economists have suggested the bank could even signal a bias to cut the OCR.
Last week Statistics NZ’s GDP data saw GDP growth slow to just 0.5 percent over the March quarter, 0.2 percent lower than the Reserve Bank’s projection.
Should the RBNZ indicate that it is extending its outlook for an eventual interest rate rise, it would imply that the slowing economy will continue to need low interest rates to stimulate growth.
The bank’s most recent Monetary Policy Statement (MPS) said that it would hold the rate until September 2019. This was itself a revision from the February 2018 MPS which projected a rate hike in the June quarter.
In May the Reserve Bank projected March GDP growth to slow to 0.7 percent, before picking up to 0.8 percent in the June quarter and peaking at 0.9 in September.
Independent economist Cameron Bagrie told Newsroom that weaker growth would mean that the RBNZ “should be on hold for longer”.
He said there could even be calls for a rate cut, although he himself would not back that view.
“Technically there doesn’t look to be the growth or excess demand story that is going to drive core inflation back to two percent so you can argue for a cut,” Bagrie said.
He said the RBNZ would be “kicking for touch” any idea of the OCR moving up before any of the mid-term inflationary risks like increased labour costs and a lower dollar materialised and were passed on to consumers.
The retail bank economists will be watching the Reserve Bank’s decision with interest.
Kiwibank’s economists Jarrod Kerr and Jeremy Couchman said the GDP numbers “are unlikely to worry the Bank” and say that a rate hike is “at least a year off”.
They believe last week’s GDP numbers show “some temporary disruption to growth,” but expect them to “perk-up and eventually require the OCR to be lifted”.
ANZ Senior Economist Liz Kendall said she expected the Reserve Bank would “remain cautious until inflation shows signs of life” and only tighten monetary policy in the second half of 2019 when it could be confident that inflation is “alive and well”.
Kendall said the economic signs since the May MPS have been negative on balance. Poor business confidence, household sentiment and spending growth and escalating international trade tensions have contributed to the negative picture.
However, wage inflation, partly as a result of the Government’s raising of the minimum wage, could be about to pick up.
Political rhetoric
National’s Finance Spokesperson Amy Adams pressed Robertson on the GDP figures at question time on Tuesday, following up on questions from last week.
Of particular concern is GDP per capita, a measurement of the share of the economy per person. This metric flat-lined over the last quarter.
Adams and Robertson clashed over the numbers, with Adams attacking the slowing growth rate, but Robertson countering that the record of the previous government was worse.
Thursday’s announcement from the Reserve Bank may contain either a veiled signal that the economy is expected to improve, or that the governor believes it needs a bit of extra help.
