RBNZ signals further policy easing as stronger NZD hurts inflation outlook

The Reserve Bank of New Zealand on Thursday released its short economic update. In the July update, the central bank gave fresh guidance on monetary policy. According to the RBNZ’s statement, the stronger New Zealand dollar is hurting the inflation outlook. Moreover, the central bank has signalled at further easing of policy. It is expected to cut OCR during its August Monetary Policy Statement, noted Westpac in a research report.

The central bank, in its economic update, mentioned that global economic prospects have diminished despite stimulatory monetary policy and low oil prices. There continues to be considerable risks on the downside. The RBNZ also stated that financial market volatility has increased after the Brexit vote, while long-term interest rates have dropped.

On domestic growth front, the central bank anticipates construction activity, solid inward migration, accommodative monetary policy and tourism to underpin the growth. But it mentioned that low dairy prices are hurting incomes in the dairy sector and are being a drag on farm spending and investment.

The central bank stated that the economic outlook is surrounded by several uncertainties. Globally, the uncertainties relate to the global growth and commodity prices outlook, political risks and fragility of global financial markets. Amongst domestic uncertainties, the central bank mentioned expectations of inflation, current pressures in the housing market and the high NZD dollar.

According to the statement, the trade-weighted exchange rate is 6 percent higher than had been assumed in the June statement that would exert additional pressure on exporters and lower tradables inflation. The RBNZ said that this would make it tough for them to meet inflation objective. A decline in exchange rate is required, stated RBNZ.

The central bank statement mentioned that house price inflation continues to be high and has become widespread throughout regions, adding to concerns regarding financial stability.  According to the RBNZ, short-term inflation expectations continue to remain low.

The Reserve Bank of New Zealand has stated that monetary policy would continue to be accommodative and that additional policy easing would be needed to guarantee that future average inflation reaches close to the middle of the target range. It mentioned that it will keep a close watch on the emerging economic data.

“We have maintained the view that the OCR would be cut to 2 percent in August, and today's statement seals the case. It also seems likely that the August MPS will leave the door open to further interest rate cuts if the currency remains elevated," added Westpac.