A split OCR decision

The Reserve Bank announced:

The Monetary Policy Committee today voted 4 – 3 to hold the OCR at 2.75 percent. …

Global events are adding to near-term inflation pressures in New Zealand. Fuel prices have risen further because of ongoing disruptions in global energy markets, and the exchange rate has fallen by around 3 percent since early September. Annual inflation is expected to increase to 4.4 percent in the December quarter, largely reflecting current futures prices for fuel. Near-term inflation forecasts are uncertain given volatility in prices for oil and refined fuels.

The New Zealand economy continues to recover, although conditions remain uneven. Export-exposed parts of the economy are benefiting from high commodity prices, strong demand for goods exports and increased tourist numbers. But domestic demand remains subdued outside of exporting centres.

It’s a reasonable decision to wait and see, but for my 2c I would have voted with the minority to raise now. I do love the fact we know what the vote was, and even who voted each way.

Prasanna Gai and Anna Breman attached material risk to the possibility that the global environment could shift abruptly. It was therefore appropriate to account for such risks when judging neutral rates and the stance of monetary policy rather than relying on most likely or mid-point measures.

So let’s see if Trump attacks Iran again, or if there is a peace deal, and also possible the impact of the US midterms on markets.

There is a risk that inflation becomes entrenched before conventional expectations measures respond, despite the previous two OCR increases. In addition, the world economy could tip abruptly into a downturn causing weaker inflation over the medium term. 

As I said, I would have voted to raise as I think entrenched expectations is a bigger risk than a global downturn. Hopefully we get neither.