RBNZ to keep interest rates unchanged through next year

Base Indicator: Inflation expectation Q1, Impact: Medium, Currency: NZD/USD
Actual: 1.8, Previous: 2.06
Next Release: 20 March, 2015

"We continue to expect the RBNZ will leave the OCR on hold for the 'foreseeable' future" - ASB

New Zealand's inflation expectations eased in the first quarter, a latest survey published by the Reserve Bank of New Zealand showed on Tuesday. Annual inflation is expected to average around 1.11 percent over the coming year, down from 1.59 percent seen in the November survey. Two-year inflation expectations fell to 1.80 percent from 2.06 percent.

"With medium-term inflation expectations currently below the mid-point of the RBNZ's target band, the RBNZ is likely to become more sensitive to any further downside surprises in inflation and inflation indicators," said ASB economist Jane Turner.

The report also said that the business managers saw the monetary policy as easy and expected it to remain the same way throughout this year. Moreover, GDP growth expectations were "little moved" from last quarter, with one-year expectations rising from 2.68 to 2.75 percent and two-year expectation remaining stable, while unemployment rate is expected to fall further.

The RBNZ has suspended the monetary policy tightening mainly due to easing inflation pressures, declining commodity prices and global uncertainty, and is likely to hold rates well into next year.

"Despite low current inflation, the details of the survey don't suggest that respondents see a case for lower interest rates. Monetary conditions are already perceived to be very loose, and GDP growth forecasts for the next two years were revised up slightly", Westpac said in a note. "On average, short-term interest rates are expected to be unchanged over the next year."

NZD/USD came under pressure following the release of weaker than expected inflation expectations. It is currently trading at 0.7448, having posted day's low at 0.7437. Pair's next support is seen at 0.7400 and a convincing break below this level could push it further to 0.7175 (4-year low).

"While upward momentum is waning quickly, only a break below 0.7400 would indicate that the current bullish NZD phase has ended. Otherwise, another leg towards 0.7595 cannot be ruled out just yet", analysts at UOB Group said in a note. "That said, 0.7595 is a very strong resistance and at this stage, a sustained move above this level is not expected."