In November’s Monetary Policy Statement, the New Zealand central bank shifted to a more neutral stance. The Reserve Bank of New Zealand cut the cash rate in November to a new record low of 1.75 percent. The central bank had stated that the policy settings including the reduction of rate would see growth robust enough to have inflation come to the middle of the target range.
At the end of last year, New Zealand’s annual inflation accelerated to 1.3 percent after staying below 1 percent in the earlier eight quarters. Part of the weakness in inflation was mainly because of global oil prices in the recent years. However, excluding fuel prices, inflation seems to have bottomed out at the end of 2015 and has gradually improved since, noted Westpac in a research report.
But it might be pretty naïve to think that inflation is on an upward trend. The rebound in inflation in 2016 was driven by the sharp depreciation of the New Zealand dollar in late 2015. Movements of exchange rate typically take the best part of one year to flow through into retail prices. However, the scenario has turned totally. The NZD has recovered all its losses in 2016. This indicates towards a new wave of downward pressure on several consumer goods this year, stated Westpac.
This signifies that the central bank would have to continue to rely on generating home-grown inflation in order to meet the inflation target. The New Zealand economy expanded 3 percent in the year to September and is likely to keep a similar rate in 2017.
After having shifted to a strongly neutral signal in November, query is whether the central bank would feel compelled to provide any hint of the timing of interest rate hikes, even if it were to be several years away, stated Westpac.
Since November, the developments in New Zealand’s economy have been mixed rather than unambiguously positive, and there has been an unintended tightening of financial conditions through increasing mortgage rates and a strengthening currency.
The Reserve Bank of New Zealand is therefore expected to stick to the bottom line of its statement from the November meeting, added Westpac. Also, the central bank might reiterate that additional cuts in the OCR are not totally off the table. The central bank had stated in November that “numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly”.
