The visible hand in economics

OCR stays at 8.25%

Posted on: September 13, 2007

The RBNZ left the OCR at 8.25%, a move that was completely expected.

They also released a monetary policy statement this month, which is what the markets were keeping an eye out for. The executive summary was pretty neutral, mentioning both global credit market uncertainty and the need to keep rates high to combat inflation. As a result, this gave little information to the market on whether the Bank was thinking about easing in March, June or September.

However, I think that the current MPS points towards loosening in the OCR late in 2008. For one, there forecast 90 day bill rate track remains high, only easing slightly into 2009. Furthermore, they forecast economic growth to March 2008 of 2.9%, significantly above other analysts forecasts. Also, they expect inflation expectations to stay near the top of the target band up until at least 2009 (falling to a low of 2.7%!).

I’m not sure how to interpret this. Does this mean that the Bank is prepared to tighten again as they are pricing in strong inflationary pressures? Or does it mean that the Bank is estimating a high track for GDP growth, so that when growth comes in lower (as it invariably will, given the lack of TOT movement in June), the Bank has a consistent reason to cut rates.

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