First Impressions of the RBNZ’s Monetary Policy Statement

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The Reserve Bank left the OCR at 1.75%, as expected.

In the press release, the crucial phrase that the next move could be “up or down” was removed. This implies that the Reserve Bank has moved away from the possibility of reducing the OCR.

However, they have not moved any closer to hiking. The numerical OCR forecast was identical to the August forecast, and implies hikes from around mid-2020. The language in the press release was just as adamantly on hold: “We expect to keep the OCR at this level [1.75%] through 2019 and into 2020”.

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The details reveal that the RBNZ recognises that inflation pressures have built. The inflation forecast was lifted, upside risks to inflation were emphasised more heavily, and rising inflation was discussed up front in the document. Intriguingly, the forecast was for inflation to rise above 2% in the medium term.

The really interesting thing is that, despite this forecast of rising inflation, the RBNZ has declined to alter its OCR forecast. In other words, the RBNZ has chosen to take the run of recent strong data in the form of higher inflation, not a higher OCR forecast. The RBNZ is choosing higher inflation, rather than a higher OCR.

This draws attention to the difference between the new RBNZ operating regime and Governor and the old. Evidently, the RBNZ now feels less bound to the 2% midpoint of the inflation target band. The RBNZ is saying it knows that inflation is rising, and it is comfortable with that. This could be because the RBNZ has been burned by inflation undershooting for years. Or it could be the influence of the new dual mandate.

Similar to previous statements, the RBNZ believes there are downside risks to growth and upside risks to inflation. However, they believe the upside risks to inflation have intensified. This has altered the balance. The RBNZ’s alternative scenarios were evenly balanced between upside and downside, whereas previously they were tilted towards downside risks.
 
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