RBNZ Holds Rates at Record Low, Shrugs at Currency's Gain

  • NZ dollar rises as Wheeler refrains from criticising strength
  • ‘The OCR will remain on hold through 2017 and 2018’: Westpac

RBNZ Keeps Rate on Hold at 1.75%

New Zealand’s central bank kept interest rates at a record low and indicated it won’t raise them anytime soon. The currency rose after the bank failed to complain about its recent strength.

“Monetary policy will remain accommodative for a considerable period,” Reserve Bank Governor Graeme Wheeler said in a statement Thursday in Wellington after holding the official cash rate at 1.75 percent. “Numerous uncertainties remain and policy may need to adjust accordingly.”

Wheeler surprised economists in May by reiterating the central bank doesn’t expect to start raising rates until late 2019, even after inflation returned to the midpoint of its 1-3 percent target range. Recent data will have done little to change Wheeler’s view that inflation will slow again, with growth coming in weaker than forecast for two straight quarters.

“Our view remains that the OCR will remain on hold through 2017 and 2018,” said Michael Gordon, acting New Zealand chief economist at Westpac Banking Corp. in Auckland. “The RBNZ needs to keep rates low to ensure sustained strength in domestic activity and a rise in underlying inflation pressures back to levels of around 2 percent.”

The New Zealand dollar rose as much as half a U.S. cent after Wheeler’s statement before easing. It bought 72.38 U.S. cents at 10:25 a.m. in Wellington from 72.18 cents immediately before the release. The currency has climbed more than 5 percent against the greenback since Wheeler’s last rate decision on May 11, exerting renewed downward pressure on inflation by damping import prices.

‘Stronger Language’

Wheeler said “a lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector,” but also noted the currency’s recent gains were partly driven by higher export prices.

“The market was expecting stronger language on the exchange rate and failure to deliver that has sent the New Zealand dollar higher,” said Zoe Wallis, chief economist at Kiwibank in Wellington. “It appears that the bank isn’t too perturbed by the rally in the currency given that export prices have also risen.”

All 15 economists surveyed by Bloomberg expected today’s decision, and they all forecast the benchmark rate will remain at 1.75 percent throughout this year. Still, five tip a rise in early 2018, and swaps data this week showed about an 80 percent chance of an increase by the end of June next year.

By contrast, the RBNZ in May projected the first rate increase in the third quarter of 2019. Assistant Governor John McDermott said then that markets were underestimating the downside risks to growth and inflation.

Temporary Factors

Even though inflation has picked up much faster than the RBNZ expected, climbing to 2.2 percent in the March quarter, the bank has attributed that to temporary influences such as food and fuel prices. In May, it predicted inflation will slow to 1.1 percent in the first quarter of 2018.

“Non-tradables and wage inflation remain moderate but are expected to increase gradually,” Wheeler said today. “This will bring future headline inflation to the midpoint of the target band over the medium term.”

While New Zealand’s economy has been expanding at a healthy pace the past several years, supported by record immigration and booming tourism and construction, growth fell short of expectations in the fourth quarter of 2016 and the first quarter of 2017.

Positive Outlook

“Nevertheless, the growth outlook remains positive, supported by accommodative monetary policy, strong population growth, and high terms of trade,” Wheeler said. “Recent changes announced in Budget 2017 should support the outlook for growth,” he added.

In its May budget, the government pledged to raise tax thresholds and increase support for low and middle-income families if re-elected in the Sept. 23 general election. The package is worth NZ$6.5 billion ($4.7 billion) over four years.

The RBNZ didn’t repeat a line from its May statement that recent developments had been neutral for its monetary policy stance.

Wheeler, whose five-year term as governor ends Sept. 26, has introduced lending restrictions to cool the nation’s rampant housing market and give himself more room to stoke inflation with cheap borrowing costs. Tighter rules, particularly for property investors, slowed annual house-price gains to 9.7 percent in May, the lowest in almost two years.

“This moderation is projected to continue, although there is a risk of resurgence given the on-going imbalance between supply and demand,” Wheeler said.

— With assistance by Kimberley Painter

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