Our take on the latest Monetary policy review (Wed 18 Aug 2021)
"Less need for the existing level of monetary stimulus"
OCR on hold due to Level 4 uncertainty, but expected to rise
Higher inflation seen as temporary still, but larbour market tighter
The key numbers...
- The Reserve Bank held the official cash rate (OCR) at 0.25% in acknowledgement of the “heightened uncertainty” with New Zealand moving to Alert Level 4 lockdown. However, the Bank made it clear that it would look to “further reduce the level of monetary stimulus” moving forward.
- The Bank sees “temporary factors”, including supply chain issues, pushing inflation up to a peak of 4.1%pa in the last two quarters of 2021, before slowing back towards the 2%pa midpoint by the second half of 2022.
- “Employment is currently at or above its maximum sustainable level” according to the Reserve Bank, with the unemployment rate expected to fall to a low of 3.8% in September 2022. The lower underemployment rate has also reinforced the Bank’s view that there is less spare capacity in the labour market.
- The published OCR track implies rises across the next few years, with increases of 50 basis points (bp) by the end of 2021 (to 0.75%), another 100bp in 2022 (to 1.75%), 50bp in 2023 (to 2.25%) and then 25bp in 2024 (to 2.50%).
OCR expected to start rising
Official cash rate forecast, RBNZ August 2021 MPS, quarterly averages
...and our reaction
- The Reserve Bank’s decision to hold off from increasing the OCR, as it had been set to do today, was the right call. With the uncertainty caused by the move into an Alert Level 4 lockdown, the Bank struck the right balance of saying “not right now” but very clearly stating that monetary stimulus needs to be reduced.
- Projections show a surprisingly softer profile of economic growth from 2023 onwards – a view consistent with our own that stronger growth now might limit trend growth in future years given spending and labour supply constraints. Reserve Bank projections show quarterly economic growth averaging 0.6% between now and the end of 2022, but then only averaging 0.3% during 2023 and 2024.
- The Bank’s determination that border closures will sustain labour market tightness aligns with our assessment, although we harbour doubts that the inflationary pressures at present will dissipate as quickly as the Bank thinks.
- It appears that bond sales are being considered to wind back the Large Scale Asset Purchase (LSAP) programme, with staff directed to “develop an operational strategy to inform decisions on the management of Government and LGFA bonds purchased under the LSAP programme” – a potential additional option for tightening.
- The Reserve Bank has made it clear that less monetary stimulus is needed, and that it will actively look to reduce stimulus soon. Assuming COVID-19 conditions allow, we expect the OCR to be raised at the next scheduled meeting – on 6 October – but signal that the Bank could hike rates earlier, at an out-of-cycle review, if the current lockdown proves to be short-lived.
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