RBNZ monetary policy: Assessing future bias

Reserve Bank of New Zealand (RBNZ) announced monetary policy last night and kept its key overnight cash rate unchanged at 1.75%.

Let’s look at the policy statement details to assess the bias –

• According to RBNZ policymakers, global economic growth increased and became more broad-based but uncertainties remain due to surplus capacity and rising political uncertainty. (Neutral bias)
• It notes recent rise in both short-term and long-term inflation, largely due to a rise in commodity prices. The central bank feels that the monetary policy would remain accommodative but less so in future. (Neutral bias)
• Trade-weighted exchange rate declined around 5 percent since February in response to global developments and reduce rate differential, which according to RBNZ is encouraging and should help the economy to rebalance. (Neutral bias)
• Domestic growth being supported by ongoing accommodative monetary policy, strong population growth, increased household spending, and rising construction activity. Growth was weaker than expected in the fourth quarter. (Neutral bias)
• RBNZ welcomed the recent moderation in house prices but uncertainty remains because the supply/demand mismatch remains. (Neutral bias)
• The recent increase in the headline inflation was due to higher tradable inflation namely petrol and food, which RBNZ feels will be temporary but could lead to variability in the headline for the year ahead.  (Dovish bias)
• Non-tradable and wage inflation moderate but are expected to increase gradually and it will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent. (Neutral bias)
• Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain,  and policy may need to adjust accordingly. (Neutral bias).

Compared to the previous statement, today’s one was much dovish tilted. With this statement, we expect a long pause from the RBNZ, unless the current global outlook changes materially, in terms of trade, commodity prices, and political uncertainties.

The dovish tone in the statements has pushed kiwi lower, which is currently trading at 0.684 against the dollar.