RBNZ Preview: Likely to maintain OCR at 1.75 pct as inflation returns to target band for first time in two years

The Reserve Bank of New Zealand (RBNZ) is expected to maintain its overnight cash rate (OCR) at 2017’s first monetary policy meeting scheduled to be held on February 9, following a recovery in the country’s inflation, which returned to its target band for the first time in two years.

Headline inflation has returned to the RBNZ’s target band for the first time in two years, and some measures of core inflation are back at (or close) to 2 percent; inflation expectations have stabilized and evidence of capacity pressures have intensified (with the exception of Q4 labor market figures).

In addition, the global economy is looking firmer, with the Federal Reserve talking about three rate hikes this year and other central banks hinting at less inclination to ease. Also, fiscal expansion has gained greater prominence globally, at a time when the domestic economy continues to march along at a pace well above trend.

With the NZD sitting 4 percent above its November projections, wage growth remaining sticky at low levels, the unemployment rate rising in Q4, retail banks lifting mortgage and deposit rates, housing market activity far cooler than six months ago, and a number of global uncertainties and risks remaining, caution should remain a central theme. The fact the RBNZ has had to reverse two attempts at tightening cycles since 2009 is also a factor.

"We expect the Statement to strike somewhat of a cautious, neutral tone. Forward guidance is likely to be relatively nonchalant, reiterating numerous uncertainties. The need for the NZD to fall will be reinforced," said ANZ Research in its latest publication.

The growth outlook will remain strong, and while some upside tweaks to the near-term inflation profile will be necessary, any judgments around capacity, growth and inflation expectations driving stronger domestic inflation will need to be offset, at least partially, by the impact that the stronger NZD will have on tradable inflation.

Meanwhile, the New Zealand’s benchmark S&P/NZX 50 Index closed 0.58 percent higher at 7,094.38, while at 8:00 GMT, the FxWirePro's Hourly NZD Strength Index remained slightly bearish at -98.49 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex