RBNZ leaves rates on hold, dials back concerns on the New Zealand dollar

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The Reserve Bank of New Zealand left interest rates unchanged at 1.75% at the conclusion of its March monetary policy meeting, a decision that was widely expected by financial markets.

In the bank’s accompanying monetary policy statement, it said that “monetary policy will remain accommodative for a considerable period”, although acknowledged that “numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly”.

That was unchanged from the forward guidance offered by the bank when it last met in early February, and indicates that interest rates are likely to remain unchanged for the foreseeable future.

On inflation, the RBNZ said that “headline CPI will be variable over the next 12 months due to one-off effects from recent food and import price movements, but is expected to return to the midpoint of the target band over the medium term”.

It also said that “longer-term inflation expectations remain well-anchored at around 2%”.

That was slightly different from February when it said that “inflation is expected to return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradables inflation.”

On housing, another key area for policy consideration, it said that “house price inflation has moderated, and in part reflects loan-to-value ratio restrictions and tighter lending conditions”.

However, as was the case in its prior meeting, the RBNZ said that it was “uncertain whether this moderation will be sustained given the continued imbalance between supply and demand”.

The bank also appeared less concerned about the level of the New Zealand dollar.

“The trade-weighted exchange rate has fallen 4% since February, partly in response to weaker dairy prices and reduced interest rate differentials,” it said.

“This is an encouraging move, but further depreciation is needed to achieve more balanced growth.”

That was a noticeable step back from the tone expressed in February when it said “the exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector” with a “decline in the exchange rate is needed”.

The RBNZ also dropped its reference to financial conditions having firmed due to a lift in long-term interest rates and in the New Zealand dollar that was previously expressed in February.

The bank also touched upon recent release of GDP data for the December quarter last year — something that came in below expectations — noting that “some of this is considered to be due to temporary factors”.

“The growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity,” it said.

It also noted that dairy prices, New Zealand’s largest goods export by dollar value, had been volatile in recent auctions. It also said that “uncertainty remains around future outcomes”.

While the tone of the statement was largely unchanged from that issued six week’s earlier, the dialled-back language towards the New Zealand dollar, and the removal of line suggesting that tradable prices were dragging on the inflation outlook, has helped to boost the New Zealand dollar in recent trade.

Against the Australian dollar, the Kiwi has rallied 0.32%, and is up 0.11% against the US dollar.

Here’s the AUD/NZD 5-minute chart.

AUD/NZD 5-Minute Chart

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