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RBNZ's Wheeler quashes hopes for a rate cut, sending kiwi higher

Thursday 25th October 2012

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The New Zealand dollar climbed more than half a US cent after Reserve Bank governor Graeme Wheeler gave no indication he's leaning towards lower interest rates in his debut review of monetary policy.

Wheeler kept the official cash rate on hold at 2.5 percent, saying the level was appropriate "for now" and citing tepid inflation as something he's keeping close tabs on.

The kiwi climbed to 82 US cents from 81.38 cents immediately before the release after markets betting on a rate cut or looking for a bias towards looser monetary policy were disappointed.

"They didn't ease and more importantly, there was absolutely no indication in that statement they were contemplating it," said Stephen Toplis, head of research at Bank of New Zealand in Wellington. "Those people taking a punt on a move in that direction have been disappointed."

Economists and markets were divided on how Wheeler would approach monetary policy, with a Reuters survey of economists unanimously predicting no change, and traders giving a rate cut a 30 percent chance.

Wheeler reintroduced the caveat that the record-low setting for the benchmark rate remains appropriate "for now" and brought inflation back in focus after the annual pace of 0.8 percent in the September quarter was below the bank's target band of between 1 percent and 3 percent. The bank expects inflation will head back toward the middle of the target range, he said.

"We will continue to monitor inflation indicators, such as pricing intention and inflation expectation data, closely over coming months," Wheeler said in a statement. "For now it remains appropriate for the OCR to be held at 2.5 percent."

BNZ's Toplis said it was too early for Wheeler to show his hand having only been in the job for a matter of weeks and that a "steady as she goes" approach was the right way to go given the slowly improving global economy and domestic recovery.

"A number of data items opened the door for the central bank to ease if it wishes to - that they aren't considering that at this stage is entirely appropriate," Toplis said.

Wheeler is a former executive at the World Bank and most recently ran a consultancy in the US. He has signed a policy targets agreement with Finance Minister Bill English that is broadly unchanged from the one inked by predecessor Alan Bollard. Still, he said at the time it was signed last month that tweaks to the PTA gives the bank more authority "to lean against the build-up of financial imbalances" in the economy.

New Zealand is going through "modest" economic growth, with the Canterbury rebuild boosting the construction sector and housing market activity increasing as expected, Wheeler said.

Those gains were being hampered by fiscal consolidation and a strong New Zealand dollar "undermining export earnings and encouraging substitution toward imported goods and services," he said.

Wheeler was more upbeat about the global outlook, saying the risks appear "more balanced" on improving market sentiment. Still, the global economy remains fragile with "further recovery dependent on policy implementation."

Last month, the central bank trimmed its forecast for the 90-day bank bill rate, often seen as a proxy for the OCR, with the rate on hold until December next year and rising to 3.3 percent in March 2015. It had previously seen the rate unchanged at 2.7 percent until June 2013, before peaking at 3.4 percent in March 2015.

The OCR has been on hold for a record 13 meetings since Bollard sliced half a percentage point in March last year as insurance against the impacts of the Canterbury earthquake that levelled the country's second-biggest city.

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