RBNZ Seen Holding Rates All Year Even as Price Pressures Build

  • Most economists expect cash rate to stay at record-low 1.75%
  • Traders tip rate rise by year end as inflation picks up

The Reserve Bank of New Zealand (RBNZ) headquarters in Wellington.

Photographer: Mark Coote/Bloomberg

New Zealand’s central bank is expected to hold interest rates at a record low through 2017 even as inflation finally shows signs of accelerating toward target.

Reserve Bank Governor Graeme Wheeler will leave the official cash rate at 1.75 percent Thursday in Wellington, according to all 18 economists surveyed by Bloomberg. He will keep borrowing costs unchanged all year, 16 predict, while two expect another cut to 1.5 percent.

Economists’ expectations contrast with traders, who are pricing a quarter-point increase by the end of 2017 as the economy continues to expand at a healthy clip and inflation gathers pace faster than the RBNZ expected. But Wheeler may be reluctant to hint at any increase in borrowing costs with the kiwi dollar near a three-month high, and after a misstep in 2014 when he raised rates in anticipation of inflation that never eventuated.

“The tricky balancing act will be to express more comfort over the inflation outlook yet still give a clear message that OCR increases are a long way off,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “The RBNZ will want to see more evidence over time of actual inflation sustaining a firmer level before contemplating OCR increases.”

Wheeler, who will step down when his term ends in September, has spent more than two years battling benign global prices and a strong kiwi dollar in efforts to restore inflation to his 1-3 percent target range. His strategy finally appears to be working, with consumer prices rising 1.3 percent in the fourth quarter from a year earlier. The increase was slightly faster than the RBNZ projected in November.

Faster Inflation

The bank on Thursday may bring forward its projection for inflation reaching its 2 percent goal, economists said. In November, the RBNZ didn’t expect inflation to hit the midpoint of its target range until late 2018.

The New Zealand economy expanded 3.5 percent in the year through September and is estimated to expand about 3 percent in 2017. A report Tuesday showed two-year ahead inflation expectations jumped to 1.92 percent, the highest in six quarters.

Still, while demand is picking up and the labor market is tightening, the outlook for inflation may be damped by a resurgent currency, which has gained more than 10 percent in the past year. On a trade-weighted basis, the kiwi last week reached its highest since April 2015 and it is well above the average level assumed by the central bank.

“Inflation pressure is expected to only build gradually with a high New Zealand dollar keeping a lid on import prices,” Kiwibank economists Zoe Wallis and Jeremy Couchman wrote in a research note. They don’t expect a rate increase until 2019.

In 2014, Wheeler was among the first central bankers to respond to signs of emerging inflation after the global financial crisis by lifting interest rates. He was forced to reverse that tightening a year later.

“Past experience will make the RBNZ cautious about raising rates too quickly,” said Kate Hickie, economist at Capital Economics Ltd. in Sydney. “The RBNZ may not want to suggest that it has completely ruled out the chance of a further rate cut as this could drive the dollar even higher.”

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