New Zealand's central bank sees inflation staying lower for longer

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The Reserve Bank of New Zealand (RBNZ) kept official interest rates steady at 1.75% in February, maintaining the status quo that’s been in place since November 2016.

And it looks like interest rates will remain at current levels for some time yet, thanks in part to continued weakness in inflationary pressures.

“Annual CPI inflation in December was lower than expected at 1.6%, due to weakness in manufactured goods prices,” the RBNZ said in its post meeting statement.

It said that CPI was “forecast to trend upwards towards the midpoint of the target range”, adding that longer-term inflation expectations are well anchored at 2%.

With New Zealand’s Q4 CPI report coming in well under expectations, the bank made a series of downgrades to its inflation forecasts.

Here’s its latest views, not only for CPI but also GDP, the New Zealand dollar and the overnight cash rate (OCR).

Source: RBNZ

By the end of this year, the RBNZ sees CPI sitting at 1.8%, below the 2.1% level offered three months ago. Looking further out, CPI is expected to remain at 1.8% by the end of 2019, again below the 2.0% level forecast in November.

The RBNZ’s inflation target is between 1 to 3%.

With inflation expected to remain weaker than initially anticipated, the RBNZ provided no signal that it is about to follow other major central bank’s and begin to lift interest rates.

“Monetary policy will remain accommodative for a considerable period,” it said. “Numerous uncertainties remain and policy may need to adjust accordingly”.

The bank’s forecast track for the OCR still has the first increase rate increase arriving in the middle of 2019, identical to what was seen three months ago.

Creating downward pressure on imported prices, the RBNZ said the New Zealand dollar (NZD) had “firmed since the November Statement, due in large part to a weak US dollar,” adding that it assumes “the trade weighted exchange rate (TWI will ease over the projection period.”

Even so, the bank’s updated NZD TWI forecasts is higher than the levels seen three months ago.

On the broader New Zealand economy, the RBNZ struck an optimistic tone on the outlook for growth, making small upward revisions to its latest GDP forecasts.

“GDP growth eased over the second half of 2017 but is expected to strengthen, driven by accommodative monetary policy, a high terms of trade, government spending and population growth,” it said, adding that “labour market conditions continue to tighten”.

After assessing the new government’s economic policies, the RBNZ concluded that its GDP growth profile “is weaker in the near term but stronger in the medium term”.

The bank provided little commentary on housing market conditions, especially compared to recent years, simply noting that “house price inflation has increased somewhat over the past few months but housing credit growth continues to moderate”.

For the moment, the housing market is not the concern it once was for the RBNZ.

Like their colleagues at the Reserve Bank of Australia (RBA), the bank also struck an optimistic tone on the current state of the global economy, acknowledging that “growth continues to improve”.

“While global inflation remains subdued, there are some signs of emerging pressures,” it said. “Commodity prices have increased, although agricultural prices are relatively soft.”

It also passed comment on the recent volatility in financial markets, noting “international bond yields have increased since November but remain relatively low” while equity markets have been strong “although volatility has increased recently”.

The New Zealand dollar has fallen in recent trade, undermined by the downgrade to the RBNZ’s inflation forecasts and its unchanged assessment on when it expects to first lift interest rates.

The NZD/USD currently trades at .7219, down 1.65%. It was trading at .7260 prior to the release.

NZD/USD Hourly Chart

The RBNZ’s full February monetary policy statement can be accessed here.

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