Friday 2nd February 2018
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The Reserve Bank is expected to leave the official cash rate at 1.75 percent next week and continue projecting very little increase for the next three years because inflation has slowed in an economy that's has been on a faster than expected track.
The Monetary Policy Statement next Thursday will provide a new set of forecasts and adjusted are expected because both the currency and inflation aren't where the central bank was expecting back in November and Stats NZ has recalculated its measure of gross domestic product for the 2016 and 2017 March years. The Reserve Bank will also have to consider the deflationary impact of free first-year tertiary education.
Fourth-quarter inflation of 0.1 percent was a third of the pace the bank forecast in November and the annual rate slipped back to 1.6 percent, a bigger drop than it expected. The November MPS didn't price in a 25 basis point hike until March 2020 and on that basis the RBNZ could be overtaken by the Federal Reserve this year after chair Janet Yellen repeated there would be gradual increases in the federal funds rate, currently in a target range of 1.25 percent to 1.50 percent.
The trade-weighted index was recently at 75.02, above the 73.5 level that the RBNZ projected for the first quarter.
Weaker inflation, the higher kiwi and the impact of the government’s tertiary education policies "are likely to see headline inflation retreat towards the lower end of the target band once again," said ANZ New Zealand senior economist Phil Borkin in a note. "The RBNZ will be mindful of the potential implications of this for the formation of inflation expectations."
The ANZ Roy Morgan consumer confidence survey published today shows Kiwis wound back their expectations for inflation in the next two years. The survey showed a net 3.2 percent general increase in prices is expected, down from a 3.5 percent rise seen in the previous month's survey. National house price expectations rose to 2.9 percent from 2.4 percent.
Next week's MPS will be the last review of monetary policy before Adrian Orr begins as governor in March and signs a new policy targets agreement (PTA) with Finance Minister Grant Robertson.
"With Adrian Orr set to take up the reins in March, with a new PTA yet to be signed, and with the monetary policy review underway, there is little need for the RBNZ to offer anything more than an update on where it sees inflationary pressure heading," said ASB Bank chief economist Nick Tuffley. "The brighter global outlook and the widespread number of supports to the domestic economy should keep the tone of the policy assessment reasonably upbeat, with a solid outlook for domestic economic activity depicted in the published forecasts."
Still, Tuffley expects "a broadly neutral assessment, highlighting the various uncertainties over the outlook and emphasising that interest rates will remain low for a considerable period."
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