RBNZ leaves key interest rate unchanged; maintains easing bias

The Reserve Bank of New Zealand kept the Official Cash Rate unchanged at 2.25 percent on Thursday, on par with expectations. The central bank kept its easing bias and stated that further easing of monetary policy might be needed to make sure that the future average inflation settles around the mid-range of the target. The Monetary Policy Statement of the RBNZ suggests that the central bank is upbeat about the economy and less concerned regarding low inflation than earlier in 2016, said Westpac in a research report.

RBNZ Governor Graeme Wheeler stated that volatility in the global financial market has alleviated and the global growth prospect seems to be stable. Also, Wheeler mentioned that commodity prices have rebounded modestly in recent months, but the global economy continues to be subdued in spite of stimulatory monetary policy. He added that considerable risks on the downside remain.

The central bank noted that net immigration, tourism, construction and accommodative monetary policy continue to underpin domestic activity. Meanwhile, the RBNZ mentioned that house price inflation in Auckland and other regions is adding to financial stability concerns.

Importantly, the central bank stated that inflation expectations for short-term seem to have stabilized after falling in recent quarters. Data for inflation expectations will continue to be vital for projecting future actions of the central bank, according to Westpac.

However, the central bank appeared to be worried about higher exchange rate depressing inflation. It stated that the exchange rate is “higher than appropriate given New Zealand’s low export commodity prices. Together with weak overseas inflation, this is holding down tradables inflation.”

The RBNZ seemed positive that inflation will strengthen in the coming year or two. The central bank said that inflation is likely to strengthen reflecting “the accommodative stance of monetary policy, increases in fuel and other commodity prices, an expected depreciation in the New Zealand dollar and some increase in capacity pressures.”

However, the central bank might be brought back to the easing scenario in the next 12 months. The global wobbles, along with strong NZD and pressure on local rates from higher funding costs, are determining the outlook of New Zealand economy. The possibility of central bank to lower rates in August in just more than 50 percent currently, said ANZ in a research report.