OCR announcement: Official Cash Rate to remain at 1%

Pen and paper, computer and graph

Yesterday the Reserve Bank of New Zealand announced that the Official Cash Rate (OCR) would remain unchanged at 1%. The Reserve Bank (RBNZ) is comfortable with the current unemployment level and where inflation is at. Therefore, they did not feel that a cut to the rate was necessary. The RBNZ stated "Employment is at or slightly above its maximum sustainable level while consumer price inflation is close to the 2% mid-point of our target range. Low interest rates remain necessary to keep employment and inflation around the target."

However, the RBNZ is hoping for a more considerable increase in economic growth in the second half of 2020. The slow momentum in growth last year has carried on in 2020 thus far due to the sluggish global growth, and the RBNZ has commented that they wouldn't be shy to introduce a further monetary policy to stimulate growth later on.

What next?

So, the OCR remains at 1% at this stage but where will it be by the end of 2020? There is some speculation that the rate could increase, given the expected increase in infrastructure spend as planned by the Labour Government.

This spending will likely increase the number of home buyers and mortgages, which could drive inflation above the 2.5% target as set by the RBNZ. If inflation does rise, we can expect the RBNZ to try and keep the level at mid 2%.

Another of the RBNZ's key focuses is the unemployment rate. If the OCR increases, so will the cost to operate a business. Therefore, what happens to the OCR in 2020 will depend on how the RBNZ decides to juggle the unemployment rate versus the inflation rate. The Labour Government prides themselves in having lowered the unemployment rate, so spending on infrastructure makes sense. However, what will the aftereffects be? Or will the Government let the next in charge worry about that? Watch this space.

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