We received this today from Richard Christensen at Westpac in regard to the Official Cash Rate Announcement this morning, it makes for interesting reading;

Hi

I have copied some information below from our Economics team and the RBNZ release regarding this morning’s Official Cash Rate review and the Monetary Policy Statement issued by the Reserve Bank.

We anticipate interest rates will remain largely static for the coming months as a result of today’s review and the associated comments.

OCR on hold at 3%, issues extremely dovish statement, plans to hike OCR more slowly
This morning the RBNZ left the Official Cash Rate on hold at 3%, as expected, and issued a much more dovish statement than expected. The plan for future monetary policy has been radically altered. Whereas the June Monetary Policy Statement projected that 90-day rates would rise to around 6%, now the RBNZ is projecting rates will rise to just 4.4% by mid-2012 – an implicit endorsement of current market pricing.

The detail of the Monetary Policy Statement was even weaker than the press release.

The RBNZ noted that overall global economic conditions had weakened a little – although US economic growth was slowing, growth in Asia remained robust.

The real change since June, in the RBNZ’s mind, is the outlook for NZ domestic demand. The RBNZ has slashed its forecast for residential construction and NZ consumer spending. There was an extraordinary reduction in the GDP forecast. Back in June the RBNZ expected annual growth to rise to 4% during 2011. Now, the RBNZ expects growth to hit just 2.8%. The RBNZ appears to have reached the judgement that recent down-beat confidence surveys portend an extended relapse into economic malaise.

The radically reduced growth outlook means less pressure on medium-term inflation in the RBNZ’s forecast. Back in June, the RBNZ expected robust growth to pressure inflation towards the top of the allowable 1-3% range. Now, the RBNZ expects inflation will settle comfortably at 2.2%, after a one-off spike from GST pushes inflation to 4.8%.

The RBNZ reached its judgement before the earthquake struck Canterbury. The earthquake was seen as neutral for medium-term inflation, even though it will create GDP growth in the short run. Therefore, the earthquake is seen as neutral for monetary policy.

Market implications
The statement implies no change to the OCR in October or December, and only one hike every three meetings thereafter.

Two-year swap rates fell 8bp, and the exchange rate fell 50 pips. A larger reaction was avoided, as markets had anticipated a radical change in the RBNZ’s stance. Most economists, ourselves included, will be astounded by the size the revision to the RBNZ’s plan.

RBNZ media release
The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 3.0 percent.

Reserve Bank Governor Alan Bollard said: “While the global and domestic economies continue to recover, the outlook has weakened since our June Statement. We consider it appropriate at this point to keep the OCR on hold.

“The earthquake that struck Canterbury on 4 September has significantly disrupted economic activity and is likely to continue to do so for some time yet. Many homes and businesses have been damaged, as have significant parts of Canterbury’s public infrastructure. Eventual reconstruction and repairs will require considerable resources over the next year or two, particularly in the construction sector. If, in the aftermath of the earthquake, the prices of some goods and services increase temporarily, monetary policy would remain focused on the medium-term trend in inflation. The Policy Targets Agreement explicitly instructs the Bank to look through temporary price increases generated by a natural disaster.

“Looking more generally at the domestic economy, the household sector remains cautious, with consumer spending soft, house sales falling and house prices remaining flat. With continued soft demand for credit, this suggests household spending will not increase to the extent previously projected.

“The pace of expansion in the global economy appears to have slowed in recent months with forward indicators of US growth, in particular, deteriorating noticeably. Nevertheless, continued strong growth in Australia and China will support demand for New Zealand exports, reinforcing the continued contribution of high export commodity prices.

“Overall, despite the weakened outlook, we still expect that growth will progressively absorb current surplus capacity over the next few years. In addition, changes to indirect taxes and earthquake impacts will cause headline inflation to spike higher over the coming year. Previous experience of GST increases, the fact that annual CPI inflation has been near 2 percent for the past year and a half, and the subdued state of domestic demand suggest this inflation spike will have little impact on medium-term inflation expectations.

“Over time, it is likely that further removal of monetary policy support will be required. The pace and extent of further OCR increases is likely to be more moderate than was projected in the June Statement.”

If you would like to see how this has affected exchange rates today, please visit www.orbitremit.com where you can find more information on online money transfers.

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