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RBNZ sits pat on expectation of renewed inflation, ready to cut if prices don't rise

Thursday 8th February 2018

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The Reserve Bank is ready to cut interest rates if inflation doesn't emerge as expected, but has enough confidence consumer prices will start rising to stay on hold given the murky economic outlook. 

"We put our numbers together and we feel that given the growth and capacity story" inflation is going to come back, acting governor Grant Spencer told the Parliament's finance and expenditure committee after the bank held the official cash rate at a record low 1.75 percent and signalled it probably won't hike until the latter half of next year at the earliest.

Government data showed the consumers price index rose at a slower-than-expected annual pace of 1.6 percent in the December quarter, and the RBNZ today lowered its annual inflation forecast by 0.4 of a percentage point to 1.1 percent for the March quarter. It doesn't expect inflation to return to the mid-point of its 1 percent-to-3 percent target band until September 2020 versus a prior forecast of June 2018.

When asked why the central bank didn't cut rates given the delayed return to the midpoint of the band, Spencer pointed to solid economic growth and a tight labour market. 

Earlier in the day, Spencer told reporters the "next interest rate move could be up or down. There are risks on the upside, but also on the downside."  For example, if inflation continued to surprise on the downside "it is possible we could see interest rate reductions," he said.

At the select committee, Spencer reiterated that if things pan out as forecast the next move will be an increase and said if global inflation were to increase faster than expected, impacting import prices and the New Zealand dollar, the RBNZ might have to lift rates sooner to offset the higher tradables inflation.

Given the uncertainty, "we'd rather have a steady path, a steady hand on the tiller," he said.

"It wouldn't look too good if we are easing rates and then having to move back in the other direction," Spencer said.

New Zealand's two-year swap rate fell 1 basis point to 2.15 percent as the market toned down expectations for rate increases.  Martin Rudings, senior dealer foreign exchange at OMF in Wellington, said the market had moved pushed out expectations for a rate hike to April or May of next year from earlier pricing of February or March. 

Meanwhile, Bank of New Zealand introduced a new one-year fixed term interest rate of 4.39 percent, effective from Friday, and lower than its rate of 4.59 percent. 

“New Zealanders are still enjoying some of the lowest interest rates in a generation and the economic outlook indicates that may continue for most of 2018," said BNZ director of retail and marketing Paul Carter in a statement. 


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