Dovish sentiment surprises some analysts

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

While most economists have been bullish this year on a rise, somewhere from mid2019 to the end of the year, more dovish sentiments were expressed yesterday.

Reserve Bank governor Adrian Orr said interestdriving 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.

Mr Orr said global economic growth was expected to support demand for New Zealand’s products and services and global inflationary pressure was also expected to be higher, albeit still modest.

ASB chief economist Nick Tuffley said in keeping the OCR at 1.75% and with a ‘‘neutral bias’’, Mr 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,’’ Mr Tuffley said in a statement.

While there was no urgency for the OCR to be shifted, Mr 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,’’ he said.

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

She said, despite the Reserve Bank saying the OCR could go up or down at this point, its projected hikes could 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 in a statement.

She 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 pickup in consumer price inflation,’’ she said.

Inflation has been stubbornly sitting just under 2%, below the midpoint of the Reserve Bank’s target of 1%3%.

‘‘We think that conditions war ranting a hike in the OCR, over a cut, are more probable,’’ Ms Welvaert said.

Westpac’s chief economist, Dominick Stephens, said Mr 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,’’ Mr 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 longheld 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.

Mr 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,’’ Mr Orr said.

❛ The outlook for a higher OCR in 2019 rests on conditions of stronger economic growth and a pickup in consumer price

inflation

Infometrics economist Mieke Welvaert