Our take on the latest Monetary policy review (Wed 8 May 2019)
OCR reduced to 1.50%
Expectation for another OCR cut in August
Some pass through into floating mortgage rates
The key numbers...
- The Reserve Bank’s projections suggest that there is a 50-50 chance of another cut to the official cash rate (OCR), although the implied timing of such a move is as late as the second half of 2020.
- In reality, we expect the Bank to cut the OCR again in August, given that today’s 25-point cut will have little effect on real economic outcomes.
- Cuts to the floating mortgage rate by retail banks have failed to pass on the full reduction in the OCR, and the experience of 2016 suggests today’s cuts might not be sustained as banks’ other funding costs have not changed.
- Declines in fixed mortgage rates since March and the Reserve Bank’s loan-to-value restrictions are far more important influences on the housing market’s outlook than today’s OCR move.
- Our view holds that today’s OCR cut reduces the scope for more stimulatory monetary policy in the case of a large negative shock to New Zealand’s economic outlook.
90 day bank bill rates
...and our reaction
- The Reserve Bank followed through on its March signal that interest rates would be cut, lowering the OCR by 25 basis points to 1.5%.
- Concerns about economic prospects for New Zealand’s major trading partners, combined with lower expectations of labour costs compared with February’s Monetary Policy Statement, were key contributing factors to the Bank’s decision.
- Declining population growth partly explains why the labour market has remained tight despite slower domestic growth in late 2018 and slower expected growth in the near-term. But the Reserve Bank is being pre-emptive in attempts to hold maximum sustainable levels of employment.
- The Reserve Bank was also concerned with “ongoing low business sentiment… [and] restrained investment.”
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