Grant Spencer’s first monetary policy meeting as acting Reserve Bank of New Zealand (RNBZ) governor was an uneventful one, keeping interest rates unchanged at 1.75% and providing no indication that was likely to change, at least in the near-term.
“Monetary policy will remain accommodative for a considerable period,” Spencer said in the final paragraph of the statement, adding that “numerous uncertainties remain and policy may need to adjust accordingly”.
That was exactly the same language used by his predecessor Graeme Wheeler in his final monetary policy statement as governor in August, indicating that interest rates are unlikely to change in the foreseeable future.
The rest of the statement was also largely unchanged from that released in August.
On the New Zealand dollar, always an area of focus for markets, Spencer said that “a lower New Zealand dollar would help to increase tradables inflation and deliver more balanced growth”, adding that the trade-weighted exchange rate had eased slightly since the bank last met in August.
Previously the RBNZ said that a lower New Zealand dollar was “needed” to increase tradables inflation and help deliver more balanced growth.
In relation to the property market, Spencer said that “house price inflation continues to moderate due to loan-to-value ratio restrictions, affordability constraints, and a tightening in credit conditions”, maintaining the same wording used by his predecessor.
He added that “this moderation is expected to continue, although there remains a risk of resurgence in prices given population growth and resource constraints in the construction sector”.
Previously the RBNZ said that a risk to a moderation in house prices was “continued strong population growth”.
That indicates that the bank is now less certain that strong population growth will persist, perhaps as a result of last week’s New Zealand general election.
“This accommodates ‘kingmaker’ Winston Peters of NZ First as his key platform is sharply reducing immigration growth,” said Annette Beacher, chief Asia-Pacific macro strategist at TD Securities.
On inflation, the other major area for policy consideration, Spencer said that “headline inflation is likely to decline in coming quarters, reflecting volatility in tradables inflation”.
That was only slightly changed from the view expressed in August that “headline inflation is likely to decline in coming quarters as the effects of higher fuel and food prices dissipate”.
It added that “non-tradables inflation 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” with “longer-term inflation expectations remain well anchored at around two percent”, unchanged from the August statement.
Following the release of disappointing GDP figures for the June quarter earlier this month, the RBNZ also sounded more cautious on the outlook for New Zealand economic growth.
“GDP in the June quarter grew in line with expectations, following relative weakness in the previous two quarters. While exports recovered, construction was weaker than expected,” the statement read.
“Growth is projected to maintain its current pace going forward, supported by accommodative monetary policy, population growth, elevated terms of trade, and fiscal stimulus.”
Previously it said that growth was “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”.
Again, the bank dropped the reference to strong population growth seen in the August statement.
The tweaks made to expectations for population growth, along with the unchanged neutral policy bias in the final paragraph of the statement, suggests that the RBNZ has no intention to raise interest rates anytime soon.
“There remains plenty of uncertainty around the formation of the next government and who will be the next permanent Governor of the Reserve Bank of New Zealand, but the one consistency is the dovish message that the RBNZ sent today after leaving interest rates on hold at 1.75%,” said Paul Dales, chief Australia and New Zealand economist at Capital Economics.
“It doesn’t think it will raise interest rates until the end of 2019, which makes it more dovish than central banks in most other advanced economies.”
Following the small tweaks introduced by Spencer, the New Zealand dollar has fallen slightly against the US and Australian dollars, reflecting the dovish undertones scattered throughout the September statement.
Here’s the NZD/USD 5-minute chart.
The full September monetary policy statement can be accessed here.