RBNZ keeps OCR on hold, policy likely to remain on hold for considerable period

As expected, the Reserve Bank of New Zealand kept its key interest rate on hold. The central bank maintained the OCR at 1.75 percent. Surprisingly, the central bank concluded that developments since the meeting in February have been neutral for monetary policy. It reiterated that the monetary policy would continue to be accommodative for a considerable period. Market had anticipated the central bank to hint at an earlier start to interest rate hikes, noted Westpac in a research report.

The central bank appears to be strongly of the view that the surprising acceleration in inflation to 2.2 percent in the first quarter was because of temporary factors. The RBNZ’s forecast of inflation a year from now is lower than it was in the February MPS, seemingly showing a normalisation of food prices by that time. Beyond that, inflation is still unlikely to return to the target rate of 2 percent until 2019, stated Westpac.

Meanwhile, the central bank has upwardly revised its tradables inflation projections, reflecting the lower New Zealand dollar since February. On the contrary, it has downwardly revised its projection of domestically-driven inflation for the next two years. The unexpectedly weak 0.4 percent in the fourth quarter of last year has been seen as more than a blip.

The central bank has also acknowledged the deceleration in the housing market in the past six months that would be a drag on household spending growth. The RBNZ’s interest rate projections remained the same from February. The central bank anticipates the OCR to stay the same until the second half of 2019, reaching just 2 percent by the middle of 2020.

The domestic inflation pressures continue to be subdued and the annual inflation is expected to slow down to below 2 percent in 2018 as some temporary factors drop out, said Westpac. The central bank continues to shine over the recovery in global dairy prices since the mid-2016.

“Consequently, we still think that OCR hikes will be later than what financial markets were pricing (March 2018), but earlier than the RBNZ is signalling (late 2019)”, added Westpac.