New Zealand leaves rates unchanged, Kiwi dollar rockets

Getty/Scott Nelson

The Reserve Bank of New Zealand has left interest rates unchanged at the conclusion of its April monetary policy meeting.

The decision, correctly predicted by 13 of 16 economists polled by Bloomberg, left the cash rate at a record-low level of 2.25%.

While the bank refrained from reducing interest rates at this meeting, the tone of the accompanying monetary policy statement suggests that further interest rate reductions may still arrive arrive in the months ahead.

Reinforcing this view, the bank retained its easing bias, indicating that further monetary policy easing may be required to support economic growth and inflation expectations.

“Further policy easing may be required to ensure that future average inflation settles near the middle of the target range,” said the RBNZ. “We will continue to watch closely the emerging flow of economic data.”

The also bank suggested that there were “many uncertainties” around the outlook for the New Zealand economy.

“Internationally, these relate to the prospects for global growth, particularly around China, and the outlook for global financial markets,” the statement read. “The main domestic risks relate to weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.”

The bank also expressed concern towards recent strength in the New Zealand dollar — continuing the theme seen in prior statements — noting that it “remains higher than appropriate given New Zealand’s low commodity export prices”, adding that “a lower New Zealand dollar is desirable to boost tradables inflation and assist the tradables sector”.

On inflation, the bank suggested that “there has been a material decline in shorter-term expectations”, retaining the view expressed previously in March. However, it noted that it expects “inflation to strengthen as the effects of low oil prices drop out and as capacity pressures gradually build”.

That final sentence regarding the outlook for inflation, along with the view that house prices in Auckland “may be picking up” with pressures “building in some other regions”, has put a rocket under the New Zealand dollar, creating doubt over the willingness for the RBNZ to cut interest rates further.

The NZD/USD currently sits up more than 1.5% at .6934.

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