Summary:
- RBNZ leaves OCR unchanged at 1.75% at the monetary policy meeting in May
- Interest rates left unchanged for the nineteenth consecutive month
- RBNZ gives fresh economic forecasts. Downgrades GDP and inflation
- RBNZ pursues dual mandate of employment and price stability
The Reserve Bank of New Zealand held its monetary policy meeting last week where it left the overnight cash rate (OCR) unchanged at 1.75%. Interest rates in New Zealand were left unchanged for the month of May as widely expected.
The monetary policy meeting was chaired by the newly appointed Governor, Adrian Orr. The newly appointed governor was also well received by the markets largely due to his approach in the monetary policy statement which was said to be in plain English.
The clarity in the statement is expected to keep the market expectations closely aligned to that of the central bank.
The statement from the meeting where the RBNZ leaves OCR unchanged indicated that; interest rates will likely remain at the current levels for the foreseeable future. The central bank also released its latest economic forecasts.
The RBNZ’s monetary policy statement showed that the central bank was dovish. With the exception of the economic growth and employment which the central bank called “robust,“. On inflation, the central bank’s statement showed, “However, consumer price inflation remains below the 2% mid-point of our target due, in part, to recent low food and import price inflation, and subdued wage pressures.”
The RBNZ Governor Orr said that consumer price inflation would gradually rise to the 2% annual rate over time. In this regards, the central bank governor said that to enable inflation to move to its target band, the central bank must keep the OCR at the current levels for a “considerable period of time.”
“This is the best contribution we can make, at this moment, to maximising sustainable employment and maintaining low and stable inflation,” Orr said, referring to the new dual policy mandate given to the RBNZ.
In the central bank’s meeting, the RBNZ did not talk about the exchange rate of the New Zealand dollar. This indicated that the central bank was comfortable with the exchange rate of the New Zealand dollar.
Fresh economic forecasts were also released by the Reserve Bank of New Zealand, which added to the dovish undertones for the monetary policy statement. New Zealand’s GDP growth as well as inflation was downgraded for the near term.
Based on the economic forecasts, analysts quickly pushed back expectations of a rate hike from the RBNZ. The markets now expect the first rate hike from the RBNZ to come during the third quarter of 2019. This was against earlier expectations that the RBNZ could hike rates during the second quarter of 2019.
According to the central bank’s forecasts, annual inflation is expected to average around 1.6% by December this year. Quarterly GDP growth is expected to average 0.8% by the end of the fourth quarter this year. On an annual basis, the 2018 yearly GDP is forecast to rise 2.8%.
The most recent GDP data showed that New Zealand’s economy average 2.9% in the first quarter of the year on an annual basis.
The central bank’s forecasts also the OCR rates and predicts a 25 basis point rate hike to 2% only around the first quarter of 2020. The market expectations however expect the rate hike by the third quarter of 2019.
The New Zealand dollar fell on the news with losses driven by the RBNZ’s monetary policy which was deemed to be dovish and the USD’s overall strength. The kiwi fell sharply in just a matter of weeks, losing over 6% since mid-April this year.
