April 08 OCR review
Posted April 24, 2008on:
In a widely expected move, the RBNZ left the official cash rate unchanged in April. As a result, primary interest turned to the statement.
In the statement the RBNZ admitted that economic activity has weakened more markedly than they expected in March. However, they placed the labour market, government spending, and commodity prices that will keep inflation outcomes elevated.
The most significant change in position came from there weighing of the risks:
We see significant downside risk to future activity but upside risks to inflation. A further risk to the outlook is the persistently strong New Zealand dollar which, while helping moderate headline CPI inflation, remains a drag on export growth
They seem to have moved from a neutral position, to a position where the risk on the downside are now stronger. It is interesting to note that they mention the exchange rate and export growth, indicating more of a weakening bias. This was picked up by markets and lead to a immediate decline in the NZ$.
Given the weight of probabilities they state that they “expect that the OCR will need to remain at current levels for a time yet to ensure inflation outcomes of 1 to 3 percent on average over the medium term” (note the loss of significant from last time). This tells us that rates are unlikely to fall soon – however, the June MPS will give us a clearer idea of the timing of potential cuts. Expect the market to react strongly to any surprises in the labour market data in early May.
Update: A different take on the statement by Fairfax media, stating that the statement was more hawkish than expected. This indicates to me that the NZ media has talked themselves into a bit of a negative frenzy surrounding the economy, expecting a more dovish statement then that with inflation outside of the target band is a bit unusual. I think the 50 basis point reduction in the TWI in the first 30 minutes after the statement indicates that the statement was more dovish than expected.