RBNZ likely to hold policy rate steady for foreseeable future, OCR hikes in 2017 seem premature

The Reserve Bank of New Zealand (RBNZ) is expected to hold its first monetary policy meeting of 2017 on February 9. It is widely expected to maintain its official cash rate (OCR) at a historic low of 1.75 percent amid stronger than expected lift in inflation was more broad-based than widely anticipated.

New Zealand’ headline consumer inflation was 0.4 percent q/q in the last quarter of 2016, trending above market consensus 0.3 percent growth. On an annual basis, due to base effects, inflation rose to 1.3 percent y/y, marking the end of eight consecutive quarters below the bottom of the RBNZ’s target band. Also, tradable prices rose 0.3 percent q/q (-0.1 percent y/y), while non-tradable prices rose 0.6 percent q/q (2.4 percent y/y).

Recover in crude oil prices were a boost to inflation as expected, but given the ongoing strength in the New Zealand dollar (NZD) we expect further downward pressure on these components going forward. Also, higher clothing and footwear prices on less discounting activity and increase in international airfares also boosted the tradable inflation picture

"We continue to expect the RBNZ to leave the OCR on hold for the foreseeable future. Further OCR cuts are well off the table, barring some major development.  But OCR hikes this year, as priced into wholesale interest rates, still seem premature,” said ASB chief economist Nick Tuffley in its research note.

Lastly, we at FxWirePro expect this theme of stronger and broader underlying pressures to develop further over the course of 2017. It is all consistent with an economy that is not only growing strongly, but increasingly hitting capacity and resource pressures.