The Reserve Bank of New Zealand (RBNZ) delivered few surprises at its November monetary policy meeting, keeping the cash rate steady at 1.75% while indicating that interest rates will likely remain steady for several years yet.
Given elevated levels of uncertainty following the recent New Zealand general election, the bank stuck to well-worn script, noting that “monetary policy will remain accommodative for a considerable period” with “numerous uncertainties” remaining.
“The Bank has incorporated preliminary estimates of the impact of new government policies in four areas: new government spending, the KiwiBuild programme, tighter visa requirements and increases in the minimum wage,” the bank said.
“The impact of these policies remains very uncertain.”
Given those uncertainties, the bank made no near-term changes to its forecasts for the overnight cash rate. However, it’s projections into 2019 were slightly higher than its prior forecasts offered in August, as seen in the table below.
Along with a softer tone towards the New Zealand dollar than that offered in September, that’s seen the NZD/USD surge higher, rising 0.64% to .6943 for the session.
“The exchange rate has eased since the August Statement and, if sustained, will increase tradables inflation and promote more balanced growth,” the bank said in relation to the Kiwi.
In September, it said that “a lower New Zealand dollar would help to increase tradables inflation and deliver more balanced growth”.
The lower forecasts for the New Zealand dollar are seen in the table above.
Reflecting recent weakness in the currency, it said that tradable inflation has “increased due to the lower New Zealand dollar and higher oil prices”. However, it added that this “is expected to soften in line with projected low global inflation.”
Following the release of New Zealand’s September quarter CPI report last month, it noted that “non-tradable inflation is moderate but expected to increase gradually as capacity pressures increase”, repeating the same line used in September.
Combined, it said “inflation is projected to remain near the midpoint of the target range and longer-term inflation expectations are well anchored at 2%”, maintaining a similar view to that offered previously.
It’s near-term projections for CPI were revised higher as a result of the latest inflation report and weakness in the Kiwi, although it’s longer-term view remained largely unchanged.
On the housing market, another key area of uncertainty given the government’s proposed policies, the bank adopted a softer tone than that issued in September.
“House price inflation has moderated due to loan-to-value ratio restrictions, affordability constraints, reduced foreign demand, and a tightening in credit conditions,” it said.
“Low house price inflation is expected to continue, reinforced by new government policies on housing.”
Previously it said there was a “risk of resurgence in prices given population growth and resource constraints in the construction sector”.
It also noted recent labour market data had been “strong”, an outcome, along with increased fiscal spending and elevated terms of trade, that would help to underpin economic growth despite a slowing in the housing market.
“GDP growth is projected to strengthen, with a weaker outlook for housing and construction offset by accommodative monetary policy, the continued high terms of trade, and increased fiscal stimulus,” it said.
It also painted a rosy picture on the global economy, acknowledging that it “continues to improve”.
To David de Garis, economist at the National Australia Bank, the cautiously optimistic tone in the policy statement, along with the bank’s upgrades to its inflation and cash rate forecasts, is a “clear tightening bias”.
“They seem to have gotten rid of the notion of rate cuts in what looks to be a first step toward beginning the normalisation of rates,” he says.
Following the release of the November monetary policy statement, markets now await Acting Governor Grant Spencer’s media conference that will begin at 10am in Wellington.
The full November monetary policy statement can be accessed here.