As expected, the Reserve Bank of New Zealand (RBNZ) left official interest rates unchanged at 2% at the conclusion of its September monetary policy meeting.
While the bank left rates unchanged having cut them to a fresh record low of 2% on August 11, as was the case a month earlier, the bank maintained a clear easing bias in the final paragraph of the statement, indicating that further rate cuts are likely.
“Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range. We will continue to watch closely the emerging economic data,” the bank said.
In a sign that the bar to further easing may be getting lower, the RBNZ suggested that risks stemming from the nation’s hot housing market may be starting to ebb.
“House price inflation remains excessive, posing concerns for financial stability,” the bank said. However, it added that “there are indications that recent macro-prudential measures and tighter credit conditions in recent weeks are having a moderating influence”.
Adding to the dovish commentary, the bank continued to express concern over the elevated level of the New Zealand dollar, suggesting that “a decline in the exchange rate is needed”.
“Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate,” it said.
“The trade-weighted exchange rate is higher than assumed in the August Statement. Although this may partly reflect improved export prices, the high exchange rate continues to place pressure on the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector.”
It also noted that “headline inflation is being held below the target band by continuing negative tradables inflation”, adding “although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations”.
Though largely the same as communicated in August, it suggests that the RBNZ’s concerns surrounding the currency remain entrenched when it comes to the inflation outlook, despite recent strength in dairy prices.
Though undoubtedly a dovish monetary policy statement, outside of the tweak towards housing, it was very much the same view communicated from the RBNZ a month earlier.
That is: further rate cuts are likely, the exchange rate is too high and headline inflation remains weak, thanks largely to the elevated Kiwi smothering the cost of tradable goods and services.
After initially tumbling in the moments following the release, the New Zealand dollar is now largely unchanged for the session.
The NZD/USD currently buys .7344, down 0.1% from Wendesday’s closing level.
Here’s the full September policy statement released by RBNZ governor Graeme Wheeler.