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RBNZ's Spencer keeps OCR at 1.75%, no hikes on the agenda until at least 2019

Thursday 8th February 2018

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Acting Reserve Bank governor Grant Spencer kept the official cash rate unchanged at 1.75 percent and continued to signal rates won't lift until the latter half of next year at the earliest due to the lack of inflationary pressure. The kiwi fell. 

"Monetary policy will remain accommodative for a considerable period," Spencer said in a statement. "Numerous uncertainties remain and policy may need to adjust accordingly."

The consumers price index rose at a slower pace than expected in the December quarter due to cheaper food and transport prices, continuing the trend of inflation undershooting predictions. All 12 economists polled by Bloomberg predicted the OCR would stay unchanged.

"Annual CPI inflation, at 1.6 percent, was lower than forecast for the December 2017 quarter. Measures of underlying inflationary pressure remain low," the monetary policy statement said. The RBNZ expects headline inflation "to fluctuate over the coming year, partly as a result of variable tradables inflation and the removal of fees for the first year of tertiary education," the central bank said. 

The Reserve Bank now sees annual inflation at 1.1 percent in the March quarter versus a prior forecast of 1.5 percent. It does not 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. 

While the central bank lowered its inflation expectations it did not change its forecast track for the OCR. The bank forecasts the OCR rising to 1.9 percent in June 2019, unchanged from its prior projection in November. A full rate increase is still signalled by March 2020 when the benchmark rate is forecast to be 2 percent. The key rate is seen at 2.3 percent in December 2020 and 2.3 percent in March 2021, the end of the forecast period. 

"A clear theme of inflation remaining lower for longer is emerging," said ASB Bank economists. Against that backdrop, "the risk is the RBNZ can afford to wait longer until lifting the OCR than our long-held view of February 2019," it said.  

The Reserve Bank noted the New Zealand dollar is higher than it forecast in November "due in large part to a weak US dollar." However, "we assume the trade-weighted exchange rate will ease over the projection period," Spencer said. The New Zealand dollar fell after the statement and recently traded at 72.34 US cents from 72.56 cents immediately before its release.

While the central bank expects the New Zealand dollar to fall, it did say if demand for New Zealand dollar assets were to increase, reflecting higher global investor risk appetite, the exchange rate could remain higher than assumed. In that scenario "a lower OCR would be warranted," it said. 

It also lowered its forecasts for economic growth in short-term, while raising them over the medium term. The RBNZ expects economic growth of 0.8 percent in the March quarter, versus a prior forecast of 1.2 percent, after it revised down the impact of new government policies in the short term as "the degree of fiscal stimulus is smaller than assumed in the November Statement," it said.  Among other things, the KiwiBuild housing policy is assumed to add to residential investment later in the projection. The policy targets 100,000 affordable houses being built over the next decade.

While growth is lower in the short term, annual gross domestic product growth is projected to average 3.2 percent over the forecast horizon. "This above-trend pace of growth is expected to generate an increase in capacity pressure and lift inflation to around the midpoint of the bank’s target range in the medium term," it said. 

The MPS was the last full 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.


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