RBNZ leaves rates unchanged, makes minimal changes to forecasts

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The Reserve Bank of New Zealand (RBNZ) left interest rates unchanged at 1.75% at its August monetary policy decision, an outcome that was widely expected by financial markets.

In the accompanying monetary policy statement, the bank reaffirmed that interest rates would “remain accommodative for a considerable period”, noting that “numerous uncertainties remain and policy may need to adjust accordingly”.

This was unchanged from its prior statement in June, and helps cement the view that rates are unlikely to move in either direction for some time yet.

On the New Zealand dollar, an area of focus for more markets given its recent strength, it noted that it had increased in trade-weighted terms (TWI) since the May Statement, partially in response to a weaker US dollar.

It said that “a lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth”, a slightly more aggressive view compared to that of June when it said that “a lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector”.

A lower New Zealand dollar is now “needed”, rather than “would help”.

On the inflation outlook, it said that “annual CPI inflation eased in the June quarter, but remains within the target range”.

It added that headline inflation “is likely to decline in coming quarters as the effects of higher fuel and food prices dissipate”, adding that “the outlook for tradables inflation remains weak”.

For non-tradable inflation, that impacted by domestic factors, it noted that it “remains moderate but is expected to increase gradually as capacity pressure increases, bringing headline inflation to the midpoint of the target range over the medium term”.

Aside from removing a reference to wage inflation, that was largely unchanged from the view presented in June.

On the outlook for economic growth, it said it is “expected to improve going forward, supported by accommodative monetary policy, strong population growth, an elevated terms of trade, and the fiscal stimulus outlined in Budget 2017”.

In June it had said that the growth outlook remained “positive”.

In relation to the housing market, another key area for policy consideration, it noted that “house price inflation continues to moderate due to loan-to-value ratio restrictions, affordability constraints, and a tightening in credit conditions”.

It previously said that the slowdown partly reflected loan-to-value ratio restrictions and tighter lending conditions, so the “affordability constraints” line was an addition to the August statement.

Outside of New Zealand, it offered an optimistic assessment on the outlook for the global economy, noting that growth had “become more broad-based in recent quarters”. However, it added that “inflation and wage outcomes remain subdued across the advanced economies, and challenges remain with on-going surplus capacity”.

As was the case in June, it noted that “monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward”.

So while there were a few tweaks in the August statement, it was largely a repeat of what was previously communicated in June.

And that theme was also evident in its latest economic forecasts for inflation, GDP growth, the New Zealand dollar and the outlook for interest rates, with minimal changes made to what was previously released in May.

Here’s its latest forecasts:

Source: RBNZ

And here’s what the RBNZ issued back in May.

Source: RBNZ

Importantly, the RBNZ still expects the first move in official interest rates to arrive in early 2020, unchanged from the view presented in May.

Some had speculated that the RBNZ may have altered this forecast to show interest rates remaining unchanged over the forecast period. Obviously that didn’t occur.

Along with the absence of a more aggressive tone towards the level of the New Zealand dollar, it has seen in the Kiwi push modestly higher in recent trade.

The NZD/USD currently buys .7355, up 0.25% for the session. It’s risen by a similar margin against the Australian dollar.

The August monetary policy statement can be accessed here. The new forecasts from the bank are found here.

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