Bank sits pat on cash rate
Economists note dovish tone in statement
Reserve Bank Governor Grant Spencer left the off i cial cash rate unchanged yesterday. His last monetary policy statement before handing over to Adrian Orr in March contained changes to growth and inflation forecasts but was otherwise largely unchanged from November.
Spencer said he was unfazed by the increased volatility on Wall Street and it had not affected the Reserve Bank’s calculations.
“The big test for me really is what’s happening in the bond market,” he said.
US 10-year treasury bonds had been sold off over the past couple of months and yields were rising towards 3 per cent.
“When Wall Street started selling and this nervousness about future inflation began, it was a trigger for an equities correction but it didn’t cause a sell-off in bond markets,” Spencer said. “The bond market didn’t do much at all, in fact it rallied a little bit. If we saw a further sell-off that would really tell me people are concerned about future inflation being higher than they expected.”
It was important that equity markets didn’t derail the US economic recovery, he said.
More people held stocks directly in the US and a deep sell-off could have a wealth effect on reduced household spending.
“But for that to be pervasive you need to see it in interest rates as well,” he said.
“What we want is the recovery to continue, a gradual rise of interest rates to normal levels and all this excess of easy monetary policy to be unwound.”
The global outlook was now looking more positive and broader based than it did in November.
But it was important to remember that this was still being supported by low rates and easy money, he said.
While the Reserve Bank’s rate projection remained l argely unchanged — implying a hike some time between June next year and the beginning of 2020 — the latest MPS did adjust forecasts for economic growth and inflation.
ANZ economists Sharon Zollner and Phil Borkin described the tone as “a touch more dovish”. They noted that near-term growth expectations had been lowered slightly and headline inflation was not forecast to hit 2 per cent until mid-2020 (from mid-2018 previously).
The change in growth track brought the Reserve Bank into line with Treasury’s latest forecasts, Spencer said.
They reflected an expectation that some of the new Government’s plans for spending were unlikely to have an impact on GDP until 2019. “Certainly with KiwiBuild, Treasury and ourselves feel, given the constraints on the construction sector, that it will take a while for the programme to gather pace and actually start building houses,” Spencer said.
Westpac economists said they saw the forecasts as optimistic.
“We still think the RBNZ is expecting too much of the New Zealand economy. In our view, the recent plunge in business confidence portends a slowdown in business investment that the RBNZ has not all owed f or,” chief economist Dominick Stephens wrote.