Reserve Bank leaves OCR unchanged – ‘prolonged stimulus necessary’

The Reserve Bank has left the Official Cash Rate on hold at 0.25 per cent in its first Monetary Policy Statement for the year.

In the statement, released at 2pm, Reserve Bank Governor Adrian Orr said prolonged monetary stimulus was necessary and the outlook “remained highly uncertain”.

The dollar fell 20 basis points (0.2c) immediately after the announcement.

ASB chief economist Nick Tuffley described the statement as “an attempt to hose down some of the exuberance that has gripped global financial markets as vaccine roll-outs brought optimism that the pandemic will soon be put behind us”.

The RBNZ’s quantitative programme (Large Scale Asset Purchase (LSAP) Programme of up to $100 billion) and its Funding for Lending Programme (FLP) operation were also left unchanged.

The RBNZ has upgraded its baseline forecasts for the economy to reflect the stronger than expected performance since the November MPS.

Inflation is assumed to return sustainably to around the 2 per cent target mid-point in 2023.

It is currently 1.4 per cent.

The base case assumes that domestic economic activity remains around pre-COVID-19 levels until late 2021.

Annual GDP growth accelerates from late 2022, peaking at 3.8 per cent.

The unemployment rate is assumed to increase towards 5.2 per cent over 2021 “as activity in tourism-related industries continues to be weak and is not entirely offset by higher employment in other industries”.

But the rate is then assumed to gradually return to 4.6 per cent as economic activity recovers and capacity pressure begins to increase

The base case assumption sees $50 billion of the $62 billion government’s total fiscalresponse to COVID-19 being spent.

“Economic activity in New Zealand picked up over recent months, in line with the easing of health-related social restrictions,” Orr said.

“Households and businesses also benefitted from significant fiscal and monetary policy support, bolstering their cash-flow and spending.”

International prices for New Zealand’s exports had also supported export incomes, although the New Zealand dollar exchange rate has offset some of this support.

But the economic outlook ahead remained highly uncertain, determined in large part by any future health-related social restrictions,” Orr said.

“This ongoing uncertainty is expected to constrain business investment and household spending growth.”

The Monetary Policy Committee agreed that inflation and employment would likely remain below its remit targets over the medium term in the absence of prolonged monetary stimulus.

“We continue to expect the RBNZ will gingerly start lifting the OCR from August 2022,” said ASB’s Tuffley.

“That is 18 months away, which is an eternity in a time of heightened uncertainty.”

It would ultimately depend on factors such as the border opening up and confirmation that the RBNZ’s inflation and employment objectives are clearly on track to being met, he said.

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