RBNZ likely to keep key interest rate on hold

The Reserve Bank of New Zealand is expected to keep its key interest rate on hold at 1.75 percent on Thursday, noted ANZ in a research report. The central bank is expected to stick to a neutral bias. The RBNZ governor is unlikely to rattle the cage with the tone of the accompanying statement, projections and press sentiment to strengthen the central bank’s cautious, watchful and neutral stance.

A case might be made for moving to an easing bias. Core inflation has weakened, activity growth is sub-trend, housing market momentum has decelerated a lot, a turn in the credit cycle has tightened financial conditions, the NZD has strengthened and global inflation has rolled over.

Local inflation expectations measures are expected to be next to weaken, driven by falls in headline inflation itself. Moreover, the RBNZ looks set to lower its near-term growth and inflation forecasts. There is a slight possibility that headline inflation would be projected to drop back below 1 percent again.

But medium-term inflation signals are still positive. The terms of trade have risen sharply, forward-looking indicators like business and consumer sentiment indicate towards growth rising back above trend, the labor market is tightening, and fiscal policy is set to put more money in people’s pockets.

While global inflation is rolling over again, global growth nuances have been more positive, with upside surprises of late in China and Europe, stated ANZ.