Photographer: Mark Coote/Bloomberg

RBNZ Sees Rates Staying at Record Low For Prolonged Period

  • Central bank says inflation will return to target ‘gradually’
  • Wheeler says market got ahead of itself pricing 2017 rate hike

New Zealand’s central bank damped market expectations of an interest rate increase later this year, saying it plans to keep borrowing costs at a record low for a prolonged period as inflation returns only gradually to target.

“We think the market assessment has got a bit ahead of itself,” Reserve Bank Governor Graeme Wheeler told reporters in Wellington Thursday after holding the official cash rate at 1.75 percent. While the bank has removed the possibility of lower rates from its projections, “the risks are basically evenly balanced” and “a neutral bias is the right position to have at this point,” Wheeler said.

New Zealand’s economy is growing at an annual pace of more than 3 percent, stirring price pressures. But Wheeler said the persistently strong kiwi dollar, which has gained more than 10 percent in the past year, continues to damp inflation by curbing the cost of imported goods. The currency’s strength has so far thwarted his attempts to return inflation to the 2 percent midpoint of the bank’s target band.

The New Zealand dollar dropped about half a U.S. cent on Wheeler’s remarks, and traders pushed back expectations for a rate increase to the first quarter of 2018, according to swaps data compiled by Bloomberg.

The local dollar bought 72.49 cents at 12:24 p.m. in Wellington from 73.05 cents immediately before the release. The currency “remains higher than is sustainable for balanced growth” and “a decline in the exchange rate is needed,” Wheeler said in Thursday’s statement.

All 18 economists surveyed by Bloomberg expected today’s decision. Sixteen forecast the benchmark rate will remain at 1.75 percent throughout 2017 and two are tipping a quarter point cut.

“The message is that the OCR is not going anywhere in a hurry,” said Cameron Bagrie, chief economist at ANZ Bank New Zealand in Wellington. Still, “we doubt the market will fully embrace the RBNZ’s neutral tone.”

The central bank projected the average OCR will be 1.8 percent in the second quarter of 2017 compared with its previous forecast of 1.7 percent, implicitly removing the risk of a further rate cut. However, the projections show interest rates won’t start to rise until at least the third quarter of 2019.

“Monetary policy will remain accommodative for a considerable period,” Wheeler said in the statement. “Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”

Premature Tightening

In its Monetary Policy Statement published today, the RBNZ said: “Premature tightening of policy could undermine growth and forestall the anticipated gradual increase in inflation, raising the risk of declines in longer term inflation expectations.”

Inflation accelerated to 1.3 percent in the fourth quarter, returning to the RBNZ’s 1-3 percent target band for the first time in more than two years. The central bank today forecast it will reach 2 percent in the second quarter of 2019, six months later than it predicted in November.

“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,” Wheeler said.

Healthy Growth

While New Zealand is not alone in experiencing very weak general inflation, unlike many other peers it has an economy expanding at a healthy clip, supported by record immigration and booming tourism and construction. Gross domestic product rose 3.5 percent in the third quarter from a year earlier.

Growth will accelerate to 3.7 percent in the first quarter of 2017 from a year earlier, the RBNZ forecast today. Annual growth will be 3.5 percent in the first quarter of 2018, it said.

Wheeler in October introduced new lending restrictions for property investors in an attempt to cool the nation’s rampant housing market and give himself more room to lower rates. There are signs the tighter rules may be having an impact, with house-price inflation slowing in largest city Auckland.

“Recent moderation in house-price inflation is welcome, and in part reflects loan-to-value ratio restrictions and higher mortgage rates,” Wheeler said. “It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.”

Knocked Back

Wheeler’s attempt to add another lending restriction based on debt-to-income ratios to his toolkit has been knocked back by Finance Minister Steven Joyce, who wants the RBNZ to undertake more analysis and consultation before he’ll allow it to be used.

While the RBNZ would have preferred to have the DTI instrument available to it now, Wheeler said he was encouraged by the government’s response and reiterated there is no need to deploy it imminently given current housing market conditions.

Wheeler this week confirmed he won’t seek a second term and will step down when his first ends on Sept. 26. Joyce said Deputy Governor Grant Spencer will helm the central bank for six months after Wheeler’s departure, allowing the government formed after the Sept. 23 general election enough time to make a permanent appointment.

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