March 2008 MPS: Rates on hold at 8.25%

It came as no great surprise that the official cash rate was left on hold today. As a result, attention should move to the statement and the forecasts.

What struck me in the statement was this:

“The outlook for economic activity has deteriorated somewhat since we reviewed the OCR in January.”

That has to be a poor sign. However, the chance of any cuts was dashed by this:

“Given this outlook, we expect that the OCR will need to remain at current levels for a significant time yet to ensure inflation outcomes of 1 to 3 percent on average over the medium term”

What all this means becomes clearer in their MPS, the main changes are:

  1. GDP growth is much lower (1.9%pa in the March 2009 year)
  2. The ninety day bill rate is a little higher! (a little)
  3. The inflation track is higher

The first point comes straight from the statement – global weakness will lead to a downturn in domestic growth. Furthermore, momentum has fallen out the economy more quickly than most economists picked in January.

The second point is interesting. The ninety day bill rate track usually gives an indication of where the OCR might go. However, it is not now more likely that they will lift the OCR. The reasons the ninety day bill rate track has risen is greater global uncertainty – and tighter credit for longer. Therefore the RBNZ has moved to forecasting a worse global credit situation.

The inflation track is higher because they have now included the emissions trading scheme. This is something they can look through as it is a change in the price level – not the true long run inflation rate.

Overall, this shouldn’t be terribly surprising to markets (well its not for us and I is consistent with the banks), but we’ll see 😉 .  There is some debate over whether this will lead to rate cuts sooner or later – however, with this inflation track it is unlikely that cuts will even enter into the Bank’s mind before 2009.