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RBNZ likely to again leave the OCR at 1.75 pct, says Westpac Research

The Reserve Bank of New Zealand (RBNZ) is expected to again leave the OCR at 1.75 percent at its Monetary Policy Statement next Thursday. The Bank has maintained a watchful stance for some months now. And while it sounded a slightly more upbeat tone in November, a broad spirit of cautiousness has underpinned its assessment for some time. It has been close to three months since the November Monetary Policy Statement, and developments have certainly been mixed since then, Westpac Research reported.

In November, the RBNZ made some very preliminary assumptions about selected elements of the Government’s policy mix. Following the Half-year Update and ‘mini-budget’, there is now more information available, although there is still plenty of uncertainty about the economic impact of new policy initiatives.

 The soft Q4 CPI result, base effects, the higher NZD and the impact of the Government’s tertiary education policies are likely to see headline inflation retreat towards the lower end of the target band once again. The RBNZ will be mindful of the potential implications of this for the formation of inflation expectations.

The lack of broad-based inflation pressure, despite an economy that has been performing reasonably well, will be right at the top of the list. It will leave the RBNZ believing that there is no need to rush and that “Monetary policy will remain accommodative for a considerable period.”

Meanwhile, "the RBNZ’s inflation projections will be downgraded again and it is possible that it lowers its near-term GDP forecasts a touch as well given recent signals from business surveys. One could, therefore, make an argument that developments on balance justify the RBNZ tweaking its interest rate projection lower too (and that is the direction we do see the risks pointed), but chances are it is left largely unchanged. With the first hike so far into the future, there is no urgency to take a stand," the report commented.

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