OCR status quo forecast to end of 2018

Nick Tuffley.
Nick Tuffley.
Economists are picking the Reserve Bank will keep the interest-driving official cash rate on hold, when it releases its review on Thursday.

For most analysts, the plunge by the New Zealand dollar in recent weeks, well below Reserve Bank expectations, is of rising concern.

BNZ currency strategist Jason Wong said the New Zealand dollar had come under "significant pressure" during the past month.

"Some of the fall in the New Zealand dollar we expected this year has occurred in a very short space of time and much earlier than expected, with a remarkable downturn in sentiment for the kiwi over recent weeks," he said.

Amid more more hawkish global central bank comments, the Reserve Bank had remained steadfast in its view that its OCR would remain low for a prolonged period, Mr Wong said.

There were several factors to the turnaround and weakening of the kiwi, with more hawkish Federal Reserve guidance this month having raised the prospect of three rate rises in the US rather than two, for 2017, Mr Wong said.

Michael Gordon.
Michael Gordon.
He said milk prices had tumbled, falling by more than other commodity prices and amid a trend of better-than-expected global economic indicators, and the recent run of New Zealand economic data had been on the softer side of expectations.

ASB chief economist Nick Tuffley said he expected the Reserve Bank to hold on Thursday, maintaining a neutral bias, and keep the OCR at 1.75%  to the end of 2018.

"The New Zealand dollar has continued to depreciate since the February monetary policy statement and remains below the Reserve Bank’s assumed levels, while petrol and food prices have climbed," he said.

The "most striking" change in recent weeks had been the ongoing depreciation of the New Zealand dollar, which had continued to fall further below Reserve Bank forecasts.

Not only had the kiwi declined as dairy prices fell back, the US dollar had strengthened on expectations the US’ central bank, the Federal Reserve, would lift its interest, which it did last Thursday.

Mr Tuffley said the declining New Zealand dollar and dairy price drop were "roughly cancelling each other out".

Westpac chief economist Michael Gordon also expected the OCR to be held.

"While near-term inflation is looking a bit stronger, growth in activity has fallen short of the Reserve Bank’s very optimistic forecasts. The slowdown in the housing market may have been a factor here," he said.

The issue for the Reserve Bank was not that the economy was slowing, as the  underlying picture looked "pretty steady", and growth was running at what Westpac characterised as "average",  but that the bank needed more than "average" growth to meet its inflation target, a range of 1% to 3%.

"The risk is that the economy simply doesn’t have enough puff to generate the domestic price pressures that the Reserve Bank is hoping for," Mr Gordon said.

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