NZ’s Reserve Bank may spell out path to future cuts but will hold OCR for now

The Reserve Bank is widely expected to leave the official cash rate (OCR) on hold on Thursday, but it may hint the possibilities of cuts to come.

Since Statistics New Zealand revealed on January 20 that inflation had fallen to 0.1 per cent in 2015, the lowest since it had been since 1999, speculation has been mounting that the OCR will be cut to a record low.

On Thursday Reserve Bank Governor Graeme Wheeler will release the latest review of the OCR.

Although economists are united in expecting it to be left at 2.5 per cent, the one page statement accompanying the decision may set out what it would take to make him willing to cut.

In December, when Wheeler lowered the OCR by 25 basis points to 2.5 per cent, the fourth cut of the year, he suggested that the hurdle for lowering it further was high.

The policy target agreement the Reserve Bank is subject to requires Wheeler to target inflation of 1-3 per cent over the medium term, but Wheeler’s statement suggested the target was sufficiently flexible to allow him to focus on “core” inflation, which is above 1 per cent.

The Reserve Bank Governor has also frequently expressed concerns about the risks that the inflated Auckland housing market poses to financial security, while in October he questioned whether lower interest rates would produce the kind of stimulus that was desired.

However inflation for 2015 was considerably below what the Reserve Bank projected in December, meaning it will take longer for it to get back within the target band.

Thursday’s statement could indicate that if the labour market weakens further, or global conditions deteriorate, another cut in interest rates may be warranted.

 

Original Article: NZ Business Day