The Reserve Bank of New Zealand has left interest rates unchanged at 2.25% at the conclusion of it June monetary policy meeting.
Markets and economists had been split as to whether the bank would cut rates to a record-low level of 2%.
While the bank refrained from easing policy on this occasion, it retained an easing bias in its accompanying monetary policy statement, indicating that interest rates could still move lower in the period ahead.
“Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data,” said RBNZ governor Graeme Wheeler.
However, there were signs scattered throughout the accompanying monetary policy statement that suggests the board may be moving further away, rather towards, another rate cut.
Here’s how Wheeler described the current level of the New Zealand dollar.
“The exchange rate is higher than appropriate given New Zealand’s low export commodity prices. Together with weak overseas inflation, this is holding down tradables inflation. A lower New Zealand dollar would raise tradables inflation and assist the tradables sector,” he said.
Not exactly forceful language, at least compared to prior statements. Nor was the level of concern towards the outlook for inflation.
“Headline inflation is low, mostly due to low fuel and other import prices. Long-term inflation expectations are well-anchored at 2 percent. After falling in recent quarters, short-term inflation expectations appear to have stabilised,” said Wheeler.
“We expect inflation to strengthen reflecting the accommodative stance of monetary policy, increases in fuel and other commodity prices, an expected depreciation in the New Zealand dollar and some increase in capacity pressures.”
Perhaps partially explaining the decision not to reduce interest rates on this occasion, the bank once again voiced financial stability concerns surrounding Auckland’s red hot property market.
“House price inflation in Auckland and other regions is adding to financial stability concerns. Auckland house prices in particular are at very high levels, and additional housing supply is needed,” noted Wheeler.
Like the Reserve Bank of Australia earlier this week, the RBNZ indicated that past monetary policy easing was already helping to bolster the domestic economy.
“Domestic activity continues to be supported by strong net immigration, construction, tourism and accommodative monetary policy,” said Wheeler, adding “monetary policy will continue to be accommodative”.
Counteracting the optimistic tone struck towards the outlook for the economy and inflation, the bank continued to warn of risks both at home and abroad.
“Internationally, these relate to the prospects for global growth and commodity prices, the outlook for global financial markets, and political risks,” noted Wheeler.
“Domestically, the main uncertainties relate to inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.”
Wheeler also noted that “the dairy sector remains a moderating influence with export prices below break-even levels for most farmers”.
While the RBNZ retained an easing bias, the overall tone of the statement provided no clear urgency for further monetary policy to be delivered.
However, while the board made some small upward revisions to its forecast path for the New Zealand dollar trade-weighted index, indicating that it expects the currency to decline by a lesser amount that thought in March, its forecasts for the 90-day bank bill rate were left unchanged, expecting it to bottom out at 2.1% by this time next year.
With the cash rate currently sitting at 2.25%, this suggests that the RBNZ still expects to cut rates once in the year ahead.
Fitting with the view communicated on the inflation outlook, the bank also made some small upward revisions to its inflation forecasts, remembering that its inflation target band is 1-3%.
Here’s the updated forecasts from the June policy statement.
Currently the NZD/USD buys .7084, up 1.16% for the session. It briefly traded up to .7116, the highest level seen since June 10 last year.
You can read the full June monetary policy statement here.