Reserve Bank’s cautious stance
Orr downbeat on growth as he keeps the OCR at 1.75%
The Reserve Bank looks to be leaning towards a more “dovish” stance in response to weaker-thanexpected growth numbers, economists said. The decision to leave the rate unchanged at 1.75 per cent was well anticipated by the market, but the tone of Reserve Bank Governor Adrian Orr’s comments nevertheless came as a surprise.
Economists said a rate hike was now a long way off, and that a cut was not completely out of the question.
Orr, in his statement, kept the door open, saying the bank was wellpositioned to manage change in either direction as necessary.
He said the outlook for the New Zealand economy, as detailed in the bank’s May monetary policy statement, remained intact.
“Employment is around its sustainable level and consumer price inflation remains below the 2 per cent mid-point of our target, necessitating continued supportive monetary policy for some time to come,” he said.
Global economic growth was expected to support demand for New Zealand’s products and services.
“Global inflationary pressure is also expected to be higher but remain modest. This outlook has been tempered slightly by trade tensions in some major economies,” he said.
“Domestically, ongoing spending and investment, by both households and Government, is expected to support growth,” he said.
He also noted the ongoing volatility in some emerging market economies.
Orr was quite downbeat on growth, saying recent weaker GDP out-turn implied marginally more spare capacity in the economy than
The New Zealand economy is at the crossroads, says economist Christian Hawkesby. As yesterday’s Reserve Bank made clear in its OCR statement, keeping its options open to moving rates up or down, we need to be ready to cope with change in either direction.
After an unusually long, steady expansion, things have started to slow but it is still unclear if the economy will continue to track along a “Goldilocks” path of low inflation and steady growth or whether we’ll head into rockier territory, Hawkesby says.
Talking over a beer — as part of the Economy Pub at the Pub video series — Hawkesby looks at the the bank had anticipated. He also said the Government’s projected spending “impulse” was also slightly lower and later than anticipated.
CPI inflation was likely to increase in the near term due to higher fuel prices. Beyond that, inflation was expected to gradually rise to within the bank’s desired 2 per cent annual target, resulting from capacity pressures, Orr said.
ANZ senior macro strategist Phil Borkin said he viewed the statement as being “marginally more dovish” than the previous one in May.
“The Reserve Bank is acknowledging a few more risks, globally, the deterioration of the domestic growth picture at the margin, and a bit more spare capacity,” Borkin said.
He said it looked as if the bank was showing a greater preparedness
Phil Borkin
positive and negative scenarios for the economy and discusses how economists pick their way through optimistic and pessimistic scenarios to make realistic forecasts.
So on the good news track we have some fiscal spending coming in the US by way of tax cuts and locally by way of Government investment, Hawkesby says.
“That might give legs to a further expansion in the economy,” he says. “And if that’s an environment where inflation stays low and interest rates stay low too, then that’s a good combination.”
Unfortunately there is a less positive path and with the current expansion coming up on nine years, there was a risk it might just peter out, Hawkesby says.
What would make that particularly tough would be to see inflation picking up at the same time because that would limit the Reserve Bank’s ability to respond by cutting
We think there is a need to reset expectations. Economies and markets don’t go up in a straight line. There will be volatility.
Christian Hawkesby
interest rates. When faced with a range of possible paths it was important to keep an eye on the central scenario, he says. That was the one that seemed most likely.
“Our central scenario is not where growth slows really sharply, just that we moderate from growing at 3 and a half to 4 per cent to 2 to 2 and a half,” he says.
Perversely though, the central case very rarely pans out as forecast because events happen.
So then you needed to look at possible shocks like trade wars or market crashes and assess how well placed we are to absorb those.
There is some truth to the view