RBNZ Observer Update: On hold for a while yet

No surprises here. RBNZ remained on hold today at 2.50%, as expected. Governor Bollard suggested that the domestic recovery had been modest, inflation pressures well contained and that the global economy remains fragile. All of this is a recipe for keeping rates steady at low rates. Much as was the case in the December statement, there were no references to rates being at ‘emergency settings’. These are long gone. It seems they will be on hold for a while yet. We still see the next move up, but not until Q3 this year.

Facts
- The cash rate was unchanged at 2.5 percent, in line with expectations.

- The statement said that, ‘since the time of the December Statement, financial market sentiment has improved slightly’ but ‘the global economy remains fragile’. Also, that while commodity prices have remained elevated ‘the recent appreciation of the NZD is reducing exporters’ returns’ and the European debt crisis has also ‘increased the cost of international funding’ for banks.

- Domestically, it suggested that growth was modest and there may be further delays to reconstruction in Canterbury due to aftershocks. In addition, it suggested that ‘inflation pressures have remained well contained’ with inflation now sitting ‘below 2 percent’.

- Finally, ‘given ongoing uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent to keep the OCR on hold at 2.5 percent.’

Implications
References by the RBNZ to rates being at ‘emergency settings’ are now clearly a thing of the past.

A cash rate at 2.50% seems likely to be with us for a while.

With inflation well contained, local growth only modest and persistent global risks, the RBNZ have deemed it prudent to retain their very low interest rates for the time being.

We expect that weaker global conditions in early 2012 will keep them on hold in H1. But that an improvement later in the year, particularly in Asia, plus the eventual arrival of the boost from the reconstruction of Canterbury, means the next move will be up (which we expect in Q3).

Bottom line
The cash rate was held steady at 2.50%, in line with expectations.

The statement suggested they will be on hold for a while yet.

We still see the next move up, starting in Q3 this year.

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