Reserve Bank keeps OCR at current level

by Roxanne Libatique15 May 2020

The Reserve Bank of New Zealand (RBNZ) seems to be determined to keep its promise that it would not make further official cash rate (OCR) cuts for the next 12 months – recently announcing that it decided to keep the OCR at its current level.

The RBNZ explained that it kept the OCR at 0.25% per the guidance issued on March 16, with the decision most likely to remain unchanged until early 2021.

“The committee’s decisions are guided by the Reserve Bank’s mandate and our decision-making principles on the use of alternative monetary policy instruments,” it wrote on the report. “The current goal of monetary policy tools is to reduce borrowing rates for New Zealanders, and further OCR reductions at this stage would not be effective in achieving that.”

However, the central bank clarified that it would not completely close its doors to OCR cuts. The Monetary Policy Committee is committed to using additional monetary policy tools if needed, including dropping the OCR, providing fixed-term loans to banks, and adding other types of asset to the Large-Scale Asset Purchases (LSAP) programme.

“The committee noted that a negative OCR would become an option in future. [However], at present, financial institutions are not yet operationally ready. The current goal of monetary policy tools is to reduce borrowing rates for New Zealanders, and further OCR reductions at this stage would not be effective in achieving that,” it said.

Read more: Reserve Bank draws criticism over LVR decision

Meanwhile, economists predicted further OCR cut in 2020 as the economy worsens due to the COVID-19 crisis.

“If things don't pan out as we hope, or if we see another lockdown, or activity being subdued for much longer, they will go down that path,” said Kiwibank chief economist Jarrod Kerr, as reported by Landlords.

Dominick Stephens, a chief economist at Westpac, commented that the central bank’s decision to keep the OCR at 0.25% was “exactly what we expected.”

“They are open to a negative OCR but can't implement it now. They gave forward guidance that they don't expect to change the OCR until early next year, but it wasn't an iron-clad promise,” he told Landlords.

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