Reserve Bank Governor, Graeme Wheeler, held his cards close to his chest in his latest Official Cash Rate (OCR) announcement on Thursday. The Bank maintained the OCR steady at 1.75%, largely as expected by money markets. However, markets were surprised by the Bank’s continued neutral stance on the prospects for future inflation and interest rates.
Consequently, there was a notable downward adjustment in short-term, wholesale interest rates and the New Zealand dollar immediately after the announcement.
The root of market surprise was a recent pop-up in headline CPI inflation and strong employment growth in the first three months of this year. In conjunction with a moderately lower New Zealand dollar, which is likely to provide a further lift to inflation, many had thought that Mr Wheeler might signal the need to raise the OCR earlier than the second half of 2019, as the Bank had indicated previously. He may think that, but he couldn’t possibly comment!
In its statement, the Reserve Bank expressed a sanguine view on the domestic economy, which it sees as being reasonably robust over the next three years. It is encouraged by the recent decline in the Kiwi dollar, which will provide some support for exporters. However, in its prediction for inflation the Bank has put more weight on negative aspects, including weaker domestic economic growth in the fourth quarter of last year and a recent slowdown in the housing market. It also mentioned major global challenges, including extensive political uncertainty.
Mr Wheeler therefore sees dampeners putting the clampers on OCR hikes for at least the next two years. Anything can happen in that period of course. It’s quite possible that the Bank will be forced to hike sooner than it currently indicates, particularly if the global economy continues to improve and large central banks overseas become less accommodative. Nevertheless, there is little danger that inflation will pick up alarmingly. In any case, it won’t be the end of the world if inflation goes moderately over the Bank’s target for a short while, especially after the extended period of inflation being under target.
Although the OCR might rise sooner than currently hinted at, there is unlikely to be an imperative to hike too much over the next 12-18 months. Low interest rates are likely to continue to be the norm for the foreseeable future. Accordingly, savers will need to be realistic about the income they are likely to receive from less risky investments, such as term deposits. To meet long-term savings goals a globally diversified portfolio of shares and bonds could be a more attractive proposition.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any investment decisions.