OCR Drops in Surprise Move

18/03/2016

The OCR was 3.5 percent less than a year ago, with five downward moves made since June 2015. According to the official RBNZ statement, the latest move is a reaction to global and domestic changes, including weak growth in China and Europe: "The outlook for global growth has deteriorated since the December Monetary Policy Statement, due to weaker growth in China and other emerging markets, and slower growth in Europe. This is despite extraordinary monetary accommodation, and further declines in interest rates in several countries. Financial market volatility has increased, reflected in higher credit spreads. Commodity prices remain low."

Domestic conditions also influenced the rate drop, with the dairy industry continuing to struggle and housing supply in Auckland still a major concern. Despite a weak dairy sector, however, the RBNZ expect the economy "to be supported by strong inward migration, tourism, a pipeline of construction activity and accommodative monetary policy." While core inflation is higher at 1.6 percent, headline inflation remains low due to a drop in import prices. According to the statement, "While long-run inflation expectations are well-anchored at 2 percent, there has been a material decline in a range of inflation expectations measures. This is a concern because it increases the risk that the decline in expectations becomes self-fulfilling and subdues future inflation outcomes."

The New Zealand dollar reacted strongly to the move, dropping by almost 1.5 cents against the US dollar to 66.5 cents, and by more than 1 cent against the Australian dollar to 88.9 cents. While the Kiwi managed to regain some strength in the days following the OCR drop, it has fallen once again to the same major support level.  According to ANZ senior economist Sharon Zollner, the currency's reaction showed that Wheeler was getting more "bang for his buck... He is probably quite pleased to see the currency reaction," she said, adding "There is something to be said for surprising the market if you want more bang for your buck, and he appears to have achieved that today."

The major banks have failed to pass on the move in full, with their ongoing hesitation sparking a political conversation. Labour leader Andrew Little says the government should put pressure on the major banks to reduce their mortgage interest rates, adding that he would pass legislating to make them do so if he was prime minister. Mr English is not a fan of this idea, however, saying "I don't think anyone in New Zealand wants the leader of the opposition setting interest rates, we tried that back in the 70s and 80s and it ends up with politicians always deciding to try and keep rates in a different place than they should be, so I think it's a pretty dumb idea."


Image source:  Scott Dumas / shutterstock.com