NZIER Shadow Board calls for RBNZ to keep interest rates on hold, yet changes tack to a tightening bias

RBNZ Governor Graeme Wheeler

The tables have turned and the New Zealand Institute of Economic Research’s (NZIER) Monetary Policy Shadow Board has shifted to a tightening bias.

The nine business leaders, economists and academics on the Board are calling for the Reserve Bank (RBNZ) to keep the Official Cash Rate (OCR) on hold at 1.75% when it is reviewed on Thursday.

With their average recommended rate being 1.79%, none see reason for the RBNZ to cut rates further.

“Annual inflation has edged back up to within the Reserve Bank’s 1-3% target band, and there is solid momentum in the New Zealand economy. The Shadow Board sees very little need for further easing,” NZIER senior economist, Christina Leung, says.

“With inflation picking up we expect the Reserve Bank to leave the OCR on hold until mid-2018 before embarking on a gradual tightening cycle.”

The Shadow Board was in favour of further monetary policy easing in November, before the OCR was cut from 2%.

MYOB general manager Carolyn Luey explains: “We believe the RBNZ should leave rates unchanged. Small businesses (especially in construction and tourism) tell us they are doing really well, while the dairy price effect has subsided – so cuts are off the table for the foreseeable future. Even though inflation is just starting to tick up, we believe the Bank should hold – especially given uncertainty in the global economy.”

Kiwibank chief economist Zoe Wallis adds: “Downside risks (particularly on the international front) have abated for now but could easily reappear this year. The domestic economy is performing well and inflation is heading in the right direction, but it is too early to talk about rate hikes at this stage.

MOTU senior fellow and Auckland University professor Arthur Grimes says: “With inflation being within the target range for the foreseeable future, there is no major reason to raise or lower the OCR at this time.”

VUW professor Viv Hall has a similar view: “Temporary influences continue to affect headline CPI inflation measures, but trend CPI inflation continues to pick up modestly. I expect the next OCR movement to be upwards, but there is not yet sufficient evidence to justify sustained OCR increases.”

BNZ head of research Stephen Toplis is the Board member most in favour of monetary policy tightening. He says: “Inflation continues to be held down by a strong NZD but we believe that a rising CPI, tight labour market, ongoing strength in housing and solid GDP growth all argue that the cash rate should be at least as high as where it is now.”

On the contrary, Westpac acting chief economist Michael Gordon, is least in favour of this move and maintains: “Inflation is back within the target range, but with a strong NZ dollar and only modest economic growth it will struggle to push much higher from here. The need for the RBNZ to reverse its OCR cuts looks rather distant.”