RBNZ OCR held at 1.75%

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The Reserve Bank of New Zealand’s monetary policy meeting was largely a non-event as it was partly overshadowed by the Fed’s announcement to hike interest rates.

The central bank meeting which followed a few hours after the Fed meeting last Wednesday saw the RBNZ OCR held at 1.75% in March. The central bank kept rates steady at 1.75% since September 2016.

The RBNZ’s policy meeting was largely expected by the markets. It was also the last monetary policy meeting to be chaired the acting RBNZ Governor, Grant Spencer. The new governor, Adrian Orr is expected to take over as the next governor of the Reserve Bank of New Zealand.

The RBNZ meeting did not see the release of any economic projections with investors focusing on the post-monetary policy meeting press conference. However, the press conference did not offer any surprises for investors either.

About inflation, the RBNZ said that it expects inflation to weaken further in the near term. The central bank cited the soft patch in food and energy prices and the adjustments to the government charges as one of the reasons for inflation to remain low.

In the medium term, inflation is forecast to rise towards the central bank’s mid-point target of 1% to 3%.

The RBNZ also noted that weaker than expected growth seen in the fourth quarter of 2017 was mainly due to the weather effects on agricultural production and noted that the soft patch was most likely temporary.

New Zealand’s fourth quarter GDP was seen rising just 0.6% which missed the RBNZ’s forecasts of 0.7%. Economists are now forecasting that growth in the first half of the year will also fall short of the RBNZ’s forecasts on growth.

“Growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, government spending and population growth,” the RBNZ’s monetary policy statement said noting that “labour market conditions are projected to tighten further”.

Slower pace of growth was seen as a significant headwind for inflation which is expected to remain subdued in the near term. In the February meeting, the RBNZ noted that consumer prices would rise 1.8% by the end of 2018.

“Tradables inflation is projected to remain subdued through the forecast period,” the RBNZ Governor Spencer said noting that “Non-tradables inflation is moderate but is expected to increase in line with a rise in capacity pressure.”

The central bank remained optimistic as it expects to see growth picking up and labor market conditions improving for the year ahead. However, despite these, inflation is expected to remain muted. The RBNZ also did not offer any new insights on the current exchange rate of the New Zealand dollar.

Overall, the RBNZ’s meeting showed that the central bank was in no rush to hike interest rates and was seen to be comfortable with the current monetary policy course.

“Monetary policy will remain accommodative for a considerable period,” the central bank’s statement showed noting that due to the numerous uncertainties, monetary policy might have to be adjusted accordingly. The RBNZ had previously forecast that the overnight cash rates could move higher in 2019.

The New Zealand dollar was muted to the event with most of the volatility coming from the Fed meeting that was held earlier in the day.


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