RBNZ Bucks Global Easing Trend, Signaling Extended Rate Pause

New Zealand’s central bank bucked a global policy easing trend, deciding to keep interest rates on hold even as inflation slows to zero. The currency rose.

“Our situation is quite different from some of those countries that have changed monetary policy or cut interest rates,” Governor Graeme Wheeler said Thursday in Wellington after keeping the official cash rate at 3.5 percent. “We’ve got an economy that’s growing at 3.25, perhaps 3.5 percent and we’re projecting it to continue to grow at those sorts of rates over the next two years.”

The central bank’s projections show borrowing costs unchanged through early 2017 even as inflation is seen holding below the 2 percent target over the next two years. Wheeler is reluctant to join counterparts who have cut rates this year because New Zealand’s economic growth is accelerating and there are signs of a house-price bubble developing in Auckland.

“The economic spirit is upbeat,” Cameron Bagrie, chief economist at ANZ Bank New Zealand Ltd. in Wellington, said in a note. “We are in for a considerable period of unchanged OCR settings, with an eventual resumption of hikes –- but not for a very long time.”

The New Zealand dollar rose after the statement as Wheeler disappointed some traders looking for signs of policy easing. It bought 73.01 U.S. cents at 12.09 p.m. in Wellington, from 71.94 before the RBNZ announcement.

Unjustifiably High

“On a trade weighted basis, the New Zealand dollar remains unjustifiably high and unsustainable in terms of New Zealand’s long-term fundamentals,” Wheeler said, citing one of the criteria the bank has set for currency intervention. “A substantial downward correction in the real exchange rate is needed to put New Zealand’s external accounts on a more sustainable footing.”

The RBNZ forecast that the three-month bank bill yield will remain at 3.7 percent through the first quarter of 2017, 70 basis points lower than its previous forecast track. The outlook is seen as a guide to the direction of the cash rate.

The central bank will closely monitor the impact of lower inflation on wage and price-setting behavior, and said a significant reduction in inflation expectations would warrant more supportive monetary policy.

“Our central projection is consistent with a period of stability in the OCR,” Wheeler said. “Future interest-rate adjustments, either up or down, will depend on the emerging flow of economic data. The key issue for us will be to what extent does wage and price setting behavior change.”

More than 20 central banks from Uzbekistan and China to the euro area and India have eased monetary policy this year. Many of the shifts, including those by Canada, India and Australia, weren’t forecast.

Decision Expected

Fourteen of 16 economists surveyed by Bloomberg forecast today’s decision while two tipped a quarter-point cut. Interest rate swap markets were pricing 17 basis points of rate cuts by March next year, according to a Credit Suisse Group AG index.

New Zealand was the first developed nation to tighten policy last year. The central bank paused after completing just half its intended rate increases as a strong currency, a weak global environment and falling oil prices sent inflation below the bottom of its 1 percent-to-3 percent target range.

Current price-setting behavior is consistent with inflation settling at the 2 percent midpoint in the medium term, the RBNZ said.

Inflation will be zero percent in the 12 months ending March 31, down from 0.8 percent in the fourth quarter, the bank predicted. Inflation will pick up to 1.7 percent by the end of 2016 and reach 2 percent in the third quarter of 2017, its forecasts show.

Strong Economy

Gross domestic product will expand 3 percent in the first quarter of 2015 from a year earlier, the RBNZ forecast. Annual growth will accelerate to 3.8 percent in the first quarter of 2016.

“The domestic economy remains strong,” Wheeler said. Lower gasoline prices have boosted spending, net immigration is high and monetary policy “continues to be supportive,” he said. Still, drought condition in parts of the country, reduced dairy incomes, tight controls on government spending and the strong currency are weighing on domestic growth, he said.

House prices rose 6.4 percent in the year through February, although in Auckland, home to a third of the nation’s 4.5 million people, they surged 13 percent.

The central bank on March 5 signaled it may tighten rules on lending to property investors to help curb house-price inflation. It sought views on how best to define property investment loans, which banks would be required to put into an asset sub-class and hold appropriate capital against.

Wheeler today said the change of definition is a type of “micro-prudential” policy and said no decisions have been taken on whether to apply specific rules on lending to property investors.

Before it's here, it's on the Bloomberg Terminal.