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Governor Wheeler hints at more than one OCR cut ahead

 "This is the second time in two years that we have listened to a speech by Graeme Wheeler and been stupid enough to pay attention to it," economist Stephen Toplis says.

Paul McBeth
Thu, 10 Mar 2016

More than one more interest rate cut may be justified in the months ahead, although further cuts to the record-low 2.25 percent official cash rate will depend on how the economic data shapes up, Reserve Bank governor Graeme Wheeler says.

Mr Wheeler cut the benchmark rate a quarter point today and indicated more reductions were on the cards in the forecast track for the 90-day bank bill rate, seen as a proxy for the OCR. Speaking to Parliament's finance and expenditure committee, he said the projection relies on a number of assumptions about the exchange rate, commodity prices, the housing market, and migration, all of which carry "huge uncertainties."

"The judgment we made is that we felt that two interest rate cuts might be needed – we made one of them today," Wheeler said. "Whether we need another cut or whether we need more than another cut will very much depend on the data, particularly for those things that are important."

Mr Wheeler had been reluctant to lower the benchmark rate in the face in the face of flat inflation and last month called a fixation on the headline consumer price index a "mechanistic approach" to monetary policy that ignored his ability to look through price shocks.

However, a fortnight later, the Reserve Bank's quarterly survey of expectations showed firms' perceptions of inflation were at their lowest since 1994 and this morning's monetary policy statement warned such low expectations could become a "self-fulfilling prophecy."

Today's reduction took most of the market by surprise, with traders pricing an outside chance of a cut and most forecasters predicting lower rates would come later this year.

Bank of New Zealand head of research Stephen Toplis, who expected the Reserve Bank to stay on hold, said Wheeler's desire to look through a slump in oil prices and avoid creating distortions in the wider economy appear to have dissipated, and he's now picking another reduction in June before an extended period on hold.

"This is the second time in two years that we have listened to a speech by Graeme Wheeler and been stupid enough to pay attention to it," Mr Toplis said. "The balance of risk must be that rates fall even further given the Reserve Bank's current focus on external developments and inflation expectations."

Mr Wheeler pushed back against suggestions the policy targets agreement needed amending, saying no other inflation-targeting central bank had ditched the goal and dismissed the Reserve Bank of Australia's model of setting policy by including the views of people working in other parts of the economy, saying monetary policy decisions are "a fulltime job."

When asked if he had the resources and capacity to make sound decisions, Mr Wheeler said the bank was operating under a tight five-year funding agreement that builds in an increase of about 1.2% a year.

"We have had to make 18 positions redundant. Would it be helpful to have more resources, more capability? Yes. I believe it would."

Despite the cut to the OCR, the Reserve Bank's assessment of the local economy remained fairly robust, projecting annual growth of about 3%  over the next two years as migration, tourism, construction and cheap credit make up for a slowing dairy sector.

Mr Wheeler told the committee a local recession would probably be triggered by an international event and, while the government currently has room to stimulate the economy, he didn't think it needed to at this point.

"But if it did, then it shouldn't hesitate to use it because there's a limit to what fiscal policy can do," he said.


Paul McBeth
Thu, 10 Mar 2016
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Governor Wheeler hints at more than one OCR cut ahead