RBNZ maintains benchmark rate at 2.5%, keeps door open for additional easing

The Reserve Bank of New Zealand has maintained its Official Cast Rate (OCR) at 2.5%, on par with expectations, after lowering the rate by 25bp in December. However, the central bank took a more dovish angle, opening the door for additional easing. The bank stated that some additional policy easing might be needed in the coming year, replacing its previous statement that the bank expects to accelerate inflation to the target rate of 2% at current rate settings, although it will lower rates if circumstances warrant.

A weaker domestic inflation trajectory and weak global outlook are likely to be the main reasons for the strengthening of an easing bias. Meanwhile, the depreciation of the New Zealand dollar has not been enough to give comfort to the RBNZ.

The RBNZ cash rate decision in March is expected to be a very close call. However, the central bank is expected to wait for more clarity on the data front. Furthermore, the RBNZ might be wary of taking a stance for further easing as the OCR is at a record low level.

"The largest near-term risk, in our view, is the NZD not accommodating the terms of trade weakness. We think that persistently low underlying inflation remains the largest driver to trigger another cut in 2016", says Barclays.

The central bank laid emphasis on uncertainty regarding the global economy amidst the continued weakness in China and lower oil prices pressuring inflation. Meanwhile, trade-weighted NZD is not entirely adjusting to the lower terms of trade. According to the central bank, it is "appropriate" for the NZD's further depreciation due to the current weakness in export prices.  The RBNZ, in its statement noted that the CPI for Q42015 was much lower than its forecast of 0.4% at 0.1%. The central bank stated that it expects the CPI to rise during 2016 but will take a longer time to reach the target range than expected earlier. However, the central bank acknowledged that the main weakness in the headline was due to lower fuel prices.

The RBNZ in its statement said that the domestic economy growth is likely to expand in 2016, driven by immigration, construction, tourism and a rise in sentiment. The central bank in its December forecast had mentioned that the average q/q seasonally adjusted growth is likely to accelerate from 0.5% in 2015 to 0.75% in 2016.