RBNZ's Wheeler keeps OCR at 1.75%

Thursday 11 May 2017 09:24 AM

RBNZ's Wheeler keeps OCR at 1.75%, leaves rate track unchanged; kiwi drops

By Paul McBeth

May 11 (BusinessDesk) - Reserve Bank governor Graeme Wheeler kept the official cash rate unchanged at 1.75 percent and also kept the rate track unchanged, saying the recent jump in consumer prices may only be temporary. The kiwi dollar fell on disappointment he didn't bring forward the track of rate hikes.

"The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices," Wheeler said in a statement. "These effects are temporary and may lead to some variability in headline inflation over the year ahead. Non-tradables and wage inflation remain moderate but are expected to increase gradually."

In February, the Reserve Bank adopted a neutral stance on policy, signalling the OCR would go nowhere until the middle of 2019, while acknowledging risks in the housing market and US President Donald Trump's protectionist trade measures could change the outlook.

Government figures showed annual inflation rose to 2.2 percent in the first three months of the year, well above the RBNZ’s forecast of 1.5 percent, and the bank's survey of expectations saw firms raise their view on how quickly consumer prices would rise. Economists were looking to see whether that changing view would spur Wheeler to bring forward the track of interest rate hikes. However, today Wheeler said developments since then had been neutral for monetary policy, and that while other central banks were winding back their extraordinary stimulus programmes, monetary policy would stay loose in advanced economies for some time.

The bank kept its forecast track for the OCR to be at 1.8 percent until September 2019 when it rises to 1.9 percent and doesn't fully price in an increase until March 2020 when a 2 percent rate is penciled in.

The kiwi dropped half a US cent after the release and was recently trading at 68.47 cents from 69.30 cents immediately before. ANZ Bank New Zealand chief economist Cameron Bagrie said in a note before the release that there was a risk that markets would get "a little excited" if the OCR track was brought forward.

"While the OCR will no doubt be left unchanged at 1.75 percent, attention will be on the tone, which we expect to remain balanced, cautious and watchful," Bagrie said. "The banking sector is already doing the work for the RBNZ by lifting rates amidst stiff competition for deposits and that’s a story that will continue."

New Zealand's trade-weighted index has dropped 2.3 percent since the start of the year, tracking below the RBNZ's February projections, and Wheeler said the recent decline was "encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector.". The bank cut its projections for the TWI, which it sees averaging 76 in the current June quarter, falling to 75.3 by March next year. The TWI was recently at 74.86.

Wheeler said economic growth in the second half of last year was weaker than expected, although the outlook was still positive citing "ongoing accommodative monetary policy, strong population growth, and high levels of household spending and construction activity", and the Reserve Bank raised its forecast for economic growth from late 2017.

(BusinessDesk)

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