RBNZ keeps interest rate unchanged, remains upbeat on domestic economic outlook

As widely expected, the Reserve Bank of New Zealand kept its OCR on hold at 1.75 percent. The bottom line of the Monetary Policy Statement remained unchanged from the May’s. The central bank concluded that that “Monetary Policy will remain accommodative for a considerable period”. It also noted that there are still considerable uncertainties in the international environment that might need a policy response. The central bank’s May forecasts assumed that OCR will continue to be unchanged until late 2019.

Meanwhile, the RBNZ’s general assessment of economic conditions remained greatly unchanged from May. The central bank continues to be upbeat on the domestic economy’s outlook in spite of the recent lower than anticipated first quarter GDP result. The RBNZ stated that recently announced increases in fiscal stimulus should underpin the economic growth.

The New Zealand dollar is higher than the central bank had assumed previously. This partially reflected rises in commodity prices in recent months. The RBNZ noted  that a lower NZ dollar will be helpful in terms of rebalancing growth. Furthermore, the central bank’s assessment on inflation also continues to be the same. They noted that most of the recent rise in inflation was because of transitory factors, while non-tradables inflation continues to be moderate. Meanwhile, the RBNZ anticipates the deceleration in the housing market to continue; however, it noted the risks of a resurgence given the existing demand-supply imbalance.

“We expect the continued creep higher in borrowing rates will keep house prices low for some time”, noted Westpac in a research report.

The RBNZ is expected to keep the OCR on hold through this year and the next, added Westpac. While the pace of inflation is at around 2 percent, most of its recent rise is due to temporary factors. The recent gains in food prices are expected to reverse in the coming year. The central bank needs to maintain low rates to guarantee sustained strength in domestic activity and a rise in underlying inflation pressures back to levels of about 2 percent.

At 21:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was neutral at 50.476, while the FxWirePro's Hourly Strength Index  for New Zealand Dollar was neutral at -21.5047. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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