Economic Note: Neutral but wary

The OCR is on hold at 1.75% as widely expected. The policy bias is the same as in November: "Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."  The RBNZ sees the global environment as a key downside risk. 

The RBNZ’s own OCR projections show the OCR remaining at 1.8% well into 2019, effectively a neutral stance.  The RBNZ’s outlook has a 25bp hike built in by early 2020. The flagging of a distant tightening is more realistic. But it should not be taken as a sign of an imminent tightening, given the RBNZ remains concerned about the high NZ dollar and sees the lift in long-term interest rates as an effective tightening.

We continue to view OCR increases as a long way off, towards the end of 2018. The RBNZ also noted premature tightening could undermine growth and stall the expected increase in inflation. In contrast, market pricing implies an early 2018 start, though has taken some heed of the RBNZ's caution.