OCR: What the economists said

Westpac:
The RBNZ left the Official Cash Rate at 2.5% and maintained the “on hold” outlook for the OCR. The review downplayed the high exchange rate and the current low level of inflation in a low-key way, while focussing on the positive economic outlook and rising house prices. We agree strongly with that set of priorities, but the review was more hawkish on inflation than we or markets thought the RBNZ would dare to be at this stage. Consequently, two-year swap rates rose 3bp and the NZD rose nearly half a cent.

As expected, the RBNZ made no change to the bottom line OCR outlook, repeating the key phrase from last December: “On balance it remains appropriate for the OCR to be held at 2.5 percent”.

Also as expected, the RBNZ acknowledged the overvalued exchange rate, the weak labour market, and the fact that inflation is currently below target. But all this culminated in only the slightest softening of the inflation outlook. Last December the RBNZ said it expected spare capacity would be “eliminated” by the end of this year and inflation would rise towards 2% “gradually”. Those key words were softened to spare capacity being “reduced” this year and inflation rising “slowly” towards 2%.

In contrast, commentary on the global and domestic economic outlooks was very bullish. On the global economy the RBNZ said “growth is set to recover”, and domestically “recent data ... suggest GDP growth is recovering.”