The RBNZ Observer Update: Comfortably on Hold

Comfortably on Hold

The RBNZ kept its cash rate on hold at 3.50%, as expected. Unsurprisingly, after last week’s low inflation reading, the language on inflation remains dovish, with current inflation described as both ‘modest’ and ‘low’. Meanwhile, the RBNZ once again labelled the level of the NZD ‘unjustified and unsustainable’ and stated that they expected ‘a further significant depreciation.’ On policy, the RBNZ re-iterated that ‘a period of assessment remains appropriate’. With the inflation outlook still relatively benign, we expect the RBNZ to remain on hold until H2 2015, when we expect further hikes.

Facts

- The RBNZ kept its cash rate on hold at 3.50%, as widely expected.

- The level of the NZD was once again described as ‘unjustified and unsustainable’.

- The RBNZ’s economic commentary did not contain surprises. Once again, the statement concluded that ‘a period of assessment remains appropriate'.

Implications

The RBNZ seems very comfortable. With the economy still growing at an above trend pace and inflation at the lower end of the target band, why wouldn't they be? It seems that the persistent strength of the currency, combined with the RBNZ's pro-active 100bps of tightening this year, has put New Zealand's economy in a plumb position, at least for now.

As widely expected the RBNZ remained firmly on hold, with its cash rate at 3.50% – a state that is likely to last for some time. The one-page statement released today reflects a somewhat softer global outlook, the strong domestic economy and surprisingly low inflation. The RBNZ once again noted the strength of the New Zealand economy, which has been growing ‘faster than trend’, but that they expect growth to ‘moderate over coming years’.

On the inflation front, the outlook remains relatively benign. CPI inflation fell to +1.0% y-o-y in Q3, below the RBNZ’s September forecast of +1.3%. The RBNZ did point out, though, that they expect inflation to rise ‘as the expansion continues’. The RBNZ is also clearly much more comfortable with the state of the housing market, noting that house price inflation has ‘fallen significantly’ since late 2013.

On the currency, the RBNZ repeated its view that the current level of the NZD is ‘unjustified and unsustainable’ and noted that it expects a ‘further significant depreciation’. With the RBNZ still of the view that the currency should be lower, further intervention is not off the table yet.

Overall, the RBNZ’s outlook is similar to our own. We expect that growth will slow gradually, but will remain above-trend for some time yet. Inflation remains surprisingly well-contained but should lift slowly as the economy’s spare capacity is eroded and a lower NZD lifts the cost of imported goods and services. With inflation low and likely to rise only slowly, we expect that the RBNZ will leave the cash rate unchanged until the second half of 2015, when we expect further hikes.

ENDS

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