Like its compatriots at the Reserve Bank of Australia earlier in the week, the Reserve Bank of New Zealand (RBNZ) provided no real surprises at its first monetary policy meeting of the year, leaving interest rates unchanged at 1.75%.
The move had been widely expected by economists and markets alike.
And, while expressing caution over a variety of risks, the RBNZ gave no indication that it was planning to adjust interest rates — either higher or lower — in the short to medium term.
“Monetary policy will remain accommodative for a considerable period,” it said. “Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”
On the international outlook, it said that “challenges remain with on-going surplus capacity in the global economy and rising geo-political uncertainty”.
Here’s what the RBNZ said in its monetary policy statement on the New Zealand dollar, the outlook for domestic inflation and the housing market, three key areas for policy consideration right now.
Here’s the commentary on the New Zealand dollar (out emphasis in bold):
New Zealand’s financial conditions have firmed with long-term interest rates rising and continued upward pressure on the New Zealand dollar exchange rate. 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. A decline in the exchange rate is needed.
And on the outlook for domestic inflation:
Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. 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. Longer-term inflation expectations remain well-anchored at around 2 percent.
And on developments in the housing market:
Recent moderation in house price inflation is welcome, and in part reflects loan-to-value ratio restrictions and higher mortgage rates. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.
Reflective of the bank’s concern over the elevated level of the New Zealand dollar, the bank upped its forecasts for the trade-weighted index in the year ahead.
As a consequence, it also lowered its forecast for annual consumer price inflation over the same period, expecting it to sit at 1.3% in March 2018, down from 1.6% in its previous forecasts.
And while it slightly upped its forecasts for the outlook for interest rates, seeing a rate hike in late 2019 from no change previously, the upgrade was far smaller than what many in the markets had expected.
“The market had been priced for 1.5 hikes from the RBNZ over the next 12 months (37 bps), but this morning’s RBNZ OCR track has it steady not only through this year and next and not hiking until 2019,” said David de Garis, director of economics at the National Australia Bank.
As a consequence of the downgrade to its inflation forecasts and slower-than-expected time frame for increasing rates, along with the strong language used towards the New Zealand dollar, the Kiwi has tumbled, falling by close to 1% from the level it was trading at prior to the statement’s release.
The NZD/USD currently sits at .7244.
The full February monetary policy statement, including the RBNZ’s economic projections, can be accessed here.
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