Sharechat Logo

RBNZ's Wheeler keeps OCR at 1.75%, nudges up rate track; kiwi falls

Thursday 9th February 2017

Text too small?

Reserve Bank governor Graeme Wheeler kept the official cash rate at 1.75 percent and acknowledged growing expectations for a rate hike, signalling it could come in 2019, while reiterating his concern about the strong New Zealand dollar. The kiwi dollar shed about half a US cent. 

"Monetary policy will remain accommodative for a considerable period," Wheeler said in a statement. "Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."

Three months ago the Reserve Bank cut the benchmark rate to a record low and signalled the OCR was set to stay on hold until the end of 2019. Since then, the US Federal Reserve has projected a more aggressive round of rate hikes might be needed in the world's biggest economy where robust growth will be stimulated by an expansionary infrastructure programme from President Donald Trump. That's lifted bond yields around the world and prompted some investors to start pricing in rate hikes in New Zealand as early as this year. 

A BusinessDesk survey of economists predicted Wheeler would keep the benchmark rate unchanged at today's meeting, with most expecting the first increase to come in 2018.

The Reserve Bank now sees the OCR at 1.8 percent until June 2019, rising to 2 percent by March 2020. 

In a note published before the RBNZ announcement, Bank of New Zealand currency strategist Jason Wong said they predicted the rate track would stay "well below" market pricing with the central bank uncomfortable with the persistent strength of the kiwi dollar. 

"However, we wouldn't see any possible dip in rates or NZD as long-lasting," Wong said. "The market isn't going to change its view that rates will eventually move higher (and well within the next two-to-three years, despite what the RBNZ projects) and currencies are ultimately driven by fundamentals, not how governor Wheeler thinks the NZD should behave."

The kiwi dollar fell to 72.61 US cents from 73.02 cents immediately before the release, and the trade-weighted index dropped to 79.03 from 79.49. 

Wheeler said a decline in the exchange rate was "needed" with the currency "higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector."

The persistently strong currency has been a thorn in Wheeler's side by making imported goods cheaper and restraining the bank's mandated inflation measure, the consumers price index, which returned to the target band of 1-to-3 percent in the December quarter.

Wheeler said inflation returned to the target band as last year's slump in global oil prices dropped out of the index's calculation, and that he expects CPI to "gradually" return to the 2 percent mid-point of the target band "reflecting the strength of the domestic economy and despite persistent negative tradables inflation". 

The bank projects inflation to be about 1.5 percent through most of this year, softening to 1.3 percent at the start of 2018 before creeping up to 2 percent by the middle of 2019, later than what was projected in the November forecast. 

Wheeler said the economy "increased as expected and is steadily drawing on spare resources", with an expanding population, low interest rates, and construction activity driving a positive outlook.

The bank sees gross domestic product of 3.5 percent in the March 2017 year, accelerating to 3.9 percent in 2018 before slowing to 2.8 percent and 2.2 percent in the following two years. 

BusinessDesk.co.nz

  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comment:
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

NZ dollar unchanged in local trading as markets watch US developments
Robertson's rocket for Treasury over child poverty modelling error
Green Cross community head Simon Lipscombe leaves to head Compass NZ food service group
Labour signals slow track for most contentious labour law reforms
New spray dryer planned at Waikato Innovation Park as sheep milk ramps up
Euro Corp to defend fair trading charges over steel mesh standards
Fonterra criticises Beingmate after 'extremely disappointing' earnings downgrade
Augusta lines up third property for industrial property fund
Blis cuts annual earnings guidance as impact of tough first half lingers
January 22nd Morning Report

IRG See IRG research reports