Reserve Bank to pause on interest rate cuts for now

A shadow board of economists and business leaders says interest rates should be left on hold this week, amid signs the economy may not be slowing as feared.

On Thursday the Reserve Bank of New Zealand will announce the decision in its latest review of the official cash rate [OCR], which follows three consecutive 0.25 per cent cuts to 2.75 per cent. The OCR heavily influences deposit and mortgage rates.

At the last Reserve Bank interest rate review in September, Governor Graeme Wheeler said that another cut “seems likely”, and probably before the end of the year, although it would depend on emerging economic data.

Since then the New Zealand dollar has risen sharply, dulling inflation and arguably boosting the chance of an immediate further rate cut. But the Reserve Bank is being urged to wait, with recent signs that the economy is improving.

The latest voting of the nine-member shadow monetary policy board established by the New Zealand Institute of Economic Research (NZIER) has members favouring no change on Thursday.

“Inflation is very subdued and the Reserve Bank has said lower interest rates are likely. But recent developments include a marked recovery in global dairy prices and buoyant services sector demand that will boost the economy,” NZIER senior economist Christina Leung said.

Members can split their votes between different interest rate settings.

The October vote saw 63 per cent of votes favour an OCR of 2.75 per cent, followed by 22 per cent backing for a cut to 2.50 per cent. The average of all votes cast suggested the ideal OCR was 2.7 per cent, down from 2.8 per cent in September.

Even before the shadow board made its recommendation, most mainstream economists had predicted that the Reserve Bank would leave interest rates unchanged this week.

Paul Bloxham, HSBC’s chief economist in Australia and New Zealand, said the Reserve Bank had indicated that future interest rate movements would be driven by the latest data on the performance of the economy, and this had been positive in recent weeks.

Dairy prices had recovered, consumer and business confidence had lifted, manufacturing surveys had shown a recovery and indicators for services had been the strongest since the global financial crisis, Bloxham said.

“In short, recent data have provided some reassurance that a severe slowdown is not currently on the cards.”

BNZ is still officially predicting that the Reserve Bank will cut interest rates to 2.5 per cent this week, even though its head of research Stephen Toplis has been outspoken in recent weeks saying there may be little point in doing so.

Toplis, a member of the NZIER shadow board said an interest rate cut this week was likely to do little to boost economic growth or inflation.

While economic data had been stronger than expected, calming fears of an economic slowdown, the dollar was still substantially stronger than the Reserve Bank had been predicting in its last set of detailed forecasts, and if interest rates were left on hold the dollar could rise further.

“We’re still talking about a slower economy, with risks that CPI inflation doesn’t pick up enough, soon enough, in relation to precise numerical targets,” Toplis said

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