Hot Topic NBR Focus: GMO
Hot Topic NBR Focus: GMO
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Cheap oil may spur Reserve Bank to rethink flat OCR

Reserve Bank governor Graeme Wheeler will keep the OCR at 2.5% next Thursday.

Paul McBeth
Fri, 22 Jan 2016

The global oil glut depressing consumer prices around the world may prompt the Reserve Bank to rethink its flat outlook for the official cash rate this year but economists don't think it will signal its intentions at next week's regular update.

Reserve Bank governor Graeme Wheeler will keep the OCR at 2.5% next Thursday ahead of his first public speech of the year on February 3 in Christchurch, according to a Reuters poll of 15 economists. Last month, Wheeler said he was done with cutting rates on the expectation a slump in oil prices in early 2015 would wash through the official statistics this year and a weaker kiwi dollar would pass through to higher prices.

Government figures this week showed inflation was softer than the Reserve Bank expected in the final three months of 2015, at an annual pace of just 0.1% , fuelling speculation Mr Wheeler will be forced into cutting interest to a new record low as oil prices dropped to a 13-year low.

"We are not convinced the bank will strongly signal – yet – that it is seriously contemplating an imminent OCR cut," ASB Bank chief economist Nick Tuffley said in a note. "We expect it will take a little longer for the RBNZ's stance to change significantly."

ASB still thinks Wheeler will cut the key rate in June and August, and estimates annual inflation will spend seven quarters below the central bank's 1-3%  target band.

"Although the policy target agreement emphasises the medium term, the Reserve Bank doesn't have wriggle room to absorb further disinflationary surprises," Mr Tuffley said.

Firms' pricing intentions picked up in the Institute of Economic Research's December quarter survey of business opinion, with a net 9%  of companies looking to raise prices in the coming period, compared to just 3%  hiking prices through the end of last year.

Paul Bloxham, HSBC chief economist for Australia and New Zealand, told a media briefing central banks around the world are contending with cheap oil and the advent of new technology spurring slow inflation and, while some have used unconventional tools to deal with it, New Zealand still has scope to cut interest rates which he expects it will do later this year.

"We think they're going to be on hold, but we do think they're going to have an easing bias on the fact that inflation is still too low," Bloxham said. "The lift in growth just isn't generating the same inflation we've seen in the past and the key question is whether that's a permanent feature or if it's just temporary."

The Reserve Bank attracted criticism for having to reverse its rate hikes of 2014, and it released a research paper in November saying its policy decisions can't be judged solely on the level of inflation in the country and has to adjust to new information that can trump earlier forecasts.

Westpac Banking Corp has been more pessimistic on New Zealand's inflation outlook, which it thinks will force the Reserve Bank to cut interest rates and, while it had been predicting a June reduction, the weak consumers price index created an opening for a move in March.

UBS's chief economist in New Zealand, Robin Clements said: "At a glance, the case for another OCR rate cut soon looks straightforward enough. However, as is usually the case, it isn't that simple."


Paul McBeth
Fri, 22 Jan 2016
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Cheap oil may spur Reserve Bank to rethink flat OCR