Official Cash Rate held at 0.25 percent

The Reserve Bank has confirmed the wholesale cash rate remains at 0.25 percent.
The Reserve Bank has confirmed the wholesale cash rate remains at 0.25 percent. Photo credit: Supplied.

The Official Cash Rate remains on hold at 0.25 percent, the Reserve Bank has confirmed.

In a Monetary Policy Statement released on Wednesday, the central bank said due to the COVID-19 community outbreak confirmed on Tuesday and the resulting decision to move into level 4 lockdown, it would keep the cash rate at its current setting. 

"Today’s decision was made in the context of the Government’s imposition of Level 4 COVID restrictions on activity across New Zealand," the statement said.

The OCR is still at a record low 0.25 percent. But as inflation and capacity pressures in the economy remain, the Reserve Bank signals rate rises are coming.

"The Committee will assess the inflation and employment outlook on an ongoing basis, with a view to continue to reduce the level of monetary stimulus over time so as to best meet their policy remit," the statement said.

In its July Monetary Policy Review, the Reserve Bank left the Official Cash Rate unchanged, announcing it would halt it's Large Scale Asset Purchase (LSAP) programme from July 23.

Before the COVID-19 community outbreak was announced, economists widely expected the cash rate to rise.  ASB's forecast was for three rate hikes, each by 25 basis points, in August, October and November.

Following the decision to move to alert level 4 lockdown at 11.59pm on Tuesday, on Wednesday morning, economists predicted the Reserve Bank would "wait a breath" while further information about the outbreak - and length of the level 4 lockdown - came to hand.

Commenting after the OCR announcement, Infometrics principal economist Brad Olsen said the Reserve Bank sent an "explicit" signal that monetary stimulus will ease in future.

The Reserve Bank expects inflationary pressures to remain over the next couple of years, before flattening to usual levels. The labour market looks like it will remain tight for an extended period, he said. The Reserve Bank signaled New Zealand is at - or even above - maximum sustainable employment.  

"Given that not only unemployment remains low but the underemployment rate (and underutilisation) is also low, coupled with low numbers of people applying for jobs but still high numbers of vacancies, all point towards sustained tightness in the labour market," Olsen said.

Based on current information, Infometrics is forecasting the OCR to rise at least 50 basis points (to 0.75 percent) by the end of the year.

"The expectation does seem to be for a rise in October... once we move out of alert level 4 and the economy is looking to get back on track, there's even the potential for the Reserve Bank to move quicker than that," Olsen said.

Expectations remain that interest rates will rise; ANZ increased its one-to-five-year fixed mortgage interest rates on Tuesday.   

"It's important borrowers factor that in and consider their position and budgets moving forward," Olsen said.

David McLeish, senior portfolio manager at Fisher Funds, said leading up to the COVID-19 outbreak announcement on Tuesday, the wholesale interest rate market was still pricing a high likelihood of a 25 basis point rise.

Following Wednesday's OCR announcement, wholesale interest rates moved lower, suggesting there was still "a bit of a surprise". The Reserve Bank statement suggests the pause in lifting the OCR was not only temporary but also a late decision.

"In the OCR track, they do have almost precisely 25 point hikes in October, November, February and May... I think it's a temporary decision to pause and that they've still got an OCR of over 2 percent by 2024," McLeish said.

On Wednesday afternoon, the New Zealand dollar was $0.6925 against the US dollar after it fell nearly 1.5 percent following the COVID-19 announcement.

The next scheduled OCR announcement is October 6.