Reserve Bank says monetary policy will be accommodative for a considerable period and numerous uncertainties remain

By David Hargreaves

The Reserve Bank has left the Official Cash Rate unchanged at 1.75% and reiterated earlier comments that monetary policy will remain accommodative for a considerable period.

The comments from RBNZ Governor Graeme Wheeler accompanying the rates decision are virtually a carbon copy of those produced with the February Monetary Policy Statement.

The key policy paragraph at the end of the statement was in fact unchanged from that in February, reading: "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."

Wheeler has, however, noted the recent decline in value of the New Zealand dollar and says while this has been "encouraging", further depreciation is need to achieve more balanced growth.

The kiwi dollar was virtually unmoved after the RBNZ announcement at around US70.5c.

As was widely expected in the marketplace, Wheeler has 'looked through' the recent weak GDP figures, considering them to be due to "temporary factors".

He he has also seemingly preempted the possibility of next month's inflation figures coming out surprisingly strong, as some economists are suggesting, by saying that headline inflation in the next 12 months is expected to be variable due to one-off effects from recent food and import price movements, but is expected to return to the 2% midpoint of the target band over the medium term.

Wheeler has noted that dairy prices have been volatile in recent global auctions and uncertainty remains around future outcomes.

On house prices, Wheeler has again referred to the recent slower conditions in the market, but has again refused to speculate whether the cooler market will remain so.

"House price inflation has moderated, and in part reflects loan-to-value ratio restrictions and tighter lending conditions. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand," Wheeler said.

Economists' reactions

BNZ head of research Stephen Toplis said BNZ economists continue to believe the RBNZ is understating the extent and impact of likely inflation over the next few quarters and will, "eventually, be bullied into raising interest rates earlier than projected in the MPS".

"Equally, however, we remain of the view that the market is a tad premature in its pricing of the first rate hike.

"...Where we appear to differ from the central bank’s view is that we feel less uncertain that annual inflation will hit 2.0% and stay there. Accordingly, it will necessitate the cash rate moving to neutral faster than the RBNZ cares to believe."

Toplis said, however, that only time will tell whether the BNZ economists are right "and the RBNZ will give itself that time".

"That’s why we remain of the view that there is almost no chance of a rate hike this year and very little chance of a rate hike in the first quarter of next year. Financial markets are, at least, beginning to accede to this with the first hike not now fully priced until March 2018 and the probability of a hike in November having reduced from near 50% to just over 30%."

'Move along, nothing to see here'

ANZ's chief economist Cameron Bagrie and senior economist Philip Borkin said that in many ways, the message from the RBNZ was ‘move along, nothing to see here’.

"...The hits and misses relative to its earlier projections are not meaningful enough to alter its views. It is in no hurry to alter policy – the hurdle to sway it from this stance appears high right now," they said. 

"Our view towards the monetary policy outlook is also unchanged.

"We can assume the [RBNZ] still sees an equal chance of the next move being a hike or a cut.

"However, we don’t hold that same opinion. While we can envisage scenarios where the OCR is cut again (and they largely centre on global shocks), we see a much higher likelihood of a hike, given a tightening labour market, inflation approaching target and strong capacity pressures more generally. That said, the RBNZ can afford to be patient right now, with banks effectively doing its work for it, as seen in lifting retail interest rates.

"We continue to pencil in the first OCR hike in May 2018."

Kiwibank economists said that in their view the outlook for monetary policy in New Zealand remains unchanged based on the RBNZ statement.

"We continue to expect the OCR to remain on hold until mid-2019, although acknowledge there is some risk toward an earlier hike if we see a sustained improvement in the global economy and (numerous) geo-political risks fade."

The Kiwibank economists said the reaction to the statement from financial markets has been very muted, suggesting that the RBNZ did a good job of maintaining a neutral tone.

"We might see a little bit of downward pressure on market pricing for OCR hikes in the near-term given the confirmation of the 'wait and see' approach from the RBNZ," they said.

This is the full statement from the RBNZ:

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75%.

Macroeconomic indicators in advanced economies have been positive over the past two months.  However, major challenges remain with on-going surplus capacity in the global economy and extensive geo-political uncertainty.

Global headline inflation has increased, partly due to a rise in commodity prices, although oil prices have fallen more recently. Core inflation has been low and stable. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.

The trade-weighted exchange rate has fallen 4% since February, partly in response to weaker dairy prices and reduced interest rate differentials. This is an encouraging move, but further depreciation is needed to achieve more balanced growth.

Quarterly GDP was weaker than expected in the December quarter, but some of this is considered to be due to temporary factors. The growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity. Dairy prices have been volatile in recent auctions and uncertainty remains around future outcomes.

House price inflation has moderated, and in part reflects loan-to-value ratio restrictions and tighter lending conditions. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.

Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. Headline CPI will be variable over the next 12 months due to one-off effects from recent food and import price movements, but is expected to return to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2%.

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