RBNZ likely to remain on hold through 2017 and 2018, says Westpac Research

The Reserve Bank of New Zealand (RBNZ) is expected to hold its Official Cash Rate (OCR) on hold through 2017 and 2018. Given that the RBNZ expects inflation to be testing the lower end of the 1-3 percent target range again by early 2018 (and recent developments have made this more likely), this seems like an unlikely timing for a tightening of monetary policy, Westpac Research reported.

While the central bank is expected to cover the same ground as its May Monetary Policy Statement, we saw a risk that it might use today’s statement to reinforce what a ‘neutral’ stance actually means – namely, that rate cuts are just as likely as hikes. But with no explicit reference to rate cut scenarios in today’s statement, there was a small relief bounce in the New Zealand dollar, which rose about 30 points to 0.7250.

Today’s statement repeated much of the wording of the May statement, with a few changes to acknowledge some of the developments since then. The RBNZ remains positive on the outlook for the domestic economy, despite another softer than expected GDP result in the March quarter. The RBNZ still expects economic growth to find support from low interest rates, strong population growth and the rebound in export prices, along with the stimulatory measures announced in the Budget last month.

"While the RBNZ didn’t mention recent price developments, we think these will strengthen the RBNZ’s view that annual inflation will slow substantially over the first half of 2018. But as long as the pickup in underlying inflation remains gradual, and inflation expectations remain well anchored, the RBNZ is unlikely find itself under pressure to raise rates by this time next year," the report commented.