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RBNZ's Wheeler keeps OCR at 1.75% with uncertain outlook

RBNZ's Wheeler keeps OCR at 1.75% with uncertain outlook, complains about strong kiwi

By Paul McBeth

June 22 (BusinessDesk) - Reserve Bank governor Graeme Wheeler kept the official cash rate at 1.75 percent and will look through a recent pick-up in inflation which is seen as being a temporary spike in the tradables sector while complaining about the currency's strength over the past month. The kiwi gained.

"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."

The central bank surprised some in the market last month when it reaffirmed its neutral bias, with inflation expectations appearing well-anchored and slower than anticipated economic growth meaning capacity hadn't been as stretched as policymakers feared. A rate hike isn't fully priced in until March 2020.

Wheeler again said long-term inflation expectations were anchored around 2 percent and that while non-tradable and wage inflation is "moderate", both are expected to "increase gradually". He affirmed that monetary policy will stay "accommodative for a considerable period", but may need to be adjusted as "numerous uncertainties remain".

Wheeler tried to talk down the currency, with the trade-weighted index trading about 2.6 percent higher than the central bank's projected average for the June quarter, saying it had advanced 3 percent since May, partly due to rising export prices. Government figures this month showed the country's terms of trade are at a 44-year high.

" A lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector," Wheeler said.

The kiwi jumped about half a US cent after the release, and recently traded at 72.51 US cents from 72.23 cents immediately the announcement. The trade-weighted index was at 78.26 from 77.99 before the release.

Government data last week showed New Zealand's economy grew 0.5 percent in the first three months of the year, short of the central bank's forecast expansion of 0.9 percent, reinforcing the view among economists that Wheeler would be able to keep his neutral bias.

Wheeler said economic expansion was slower than anticipated due to weaker export volumes and residential building work, but that the growth outlook was still positive, "supported by accommodative monetary policy, strong population growth, and high terms of trade" and also recent government initiatives announced in last month's budget.

House price inflation was seen slowing down, in part due to the loan-to-value lending restrictions, and Wheeler said that moderation is expected to continue, although there was a risk of a resurgence in the protracted imbalance between supply and demand.



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