March 2017 RBNZ meeting: Interest rates steady at 1.75%

The Reserve Bank of New Zealand, at its latest monetary policy meeting overnight maintained the official cash rate (OCR) at 1.75% for the fourth consecutive month.

The decision to leave interest rates unchanged was widely expected and comes after the central bank cut interest rates to 1.75% in November of 2016. In the RBNZ’s monetary policy statement, the central bank noted that monetary policy would “remain accommodative for a considerable period of time”.

As expected, the central bank’s statement noted the “uncertainties” across the globe and said that the policy would need to be adjusted according to the situation.

Growth outlook remains positive

Speaking about growth, the central bank said that the quarterly growth was weak, but brushed aside the concerns noting that it was due to temporary factors and ascertained that the growth outlook remains positive.

New Zealand’s GDP in the December 2016 quarter expanded at a pace of 0.4% while expenditure on GDP grew at a rate of 0.2%. Household expenditure expanded 0.4% while investment in fixed assets rose 0.7% during the period.

Agriculture and manufacturing sectors contributed negatively to the GDP growth while exports of goods and services fell 3.8%, largely on account of weaker dairy products.

The headline print of 0.4% expansion was lower than the 0.7% forecasts that were estimated and the data for the third quarter was also revised lower to 0.8% from 1.1% previously. On an annualized basis, New Zealand GDP expanded at a pace of 2.7%.

Inflation Data

The central bank also noted that the house-price inflation was moderating on account of tighter lending conditions, but cautioned that it was unsure if this level of moderation will continue.

On inflation, the RBNZ expects consumer price index to return to the mid-point of its target band of 1% – 3% in the medium term although it expects headline inflation to remain variable over the next few months.

The central bank also called the exchange rate’s 4% decline since February as encouraging. The RBNZ said that the decline was “in response to weaker dairy prices and narrow interest rate differentials.” However, the central bank stressed for further depreciation in the NZD.

Overall, the central bank’s statement was largely unchanged from the February monetary policy statement.

A Look at Analysts’ Forecasts

Analysts are expecting to see the RBNZ maintain its neutral stance, but expect a tightening cycle around the corner. Analysts at ANZ note that the RBNZ was more likely to hike interest rates than cut, in response to Gov. Wheeler’s comments that the central bank see’s an equal chance for a rate cut and a rate hike. The reasons for a rate hike from the central bank according to ANZ analysts include tighter labour market conditions, inflation approaching the central bank’s target and strong capacity pressures.

On the other hand, RBC analysts are expecting the RBNZ to cut interest rates by another 25 basis points by the end of this year. “We still see it unlikely that growth spends much time above potential given the expansion in the labor force, meaning underlying inflation will remain muted,” an analyst at RBC said while projecting that the risks for a rate cut are biased to the downside.

The NZDUSD has been in a steady decline since early February as the currency hovered near $0.737, posting a three-month high before giving up its gains. Following the RBNZ’s monetary policy decision, NZDUSD closed flat for the day.