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UPDATE: RBNZ's Spencer keeps rates on hold

UPDATE: RBNZ's Spencer keeps rates on hold, brings forward timing of rate hikes

(Updates to add detail throughout, comment from economist)

By Rebecca Howard

Nov. 9 (BusinessDesk) - Acting Reserve Bank governor Grant Spencer kept the official cash rate unchanged at 1.75 percent but brought forward a potential rate hike to June 2019 from September that year and lifted the inflation forecasts to factor in the impact of new government policies and a weaker currency.

While the forecasts were rejigged, Spencer reiterated "monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly," he said in a statement.

According to the central bank "in the current environment, additional stimulus would risk generating unnecessary volatility in the economy, while a premature tightening would risk undermining growth and could cause headline inflation to settle below the midpoint of the target range."

Spencer said the bank incorporated preliminary estimates of the impact of new government policies in four areas: new government spending; the KiwiBuild programme; tighter visa requirements; and increases in the minimum wage. "The impact of these policies remains very uncertain," he said.

All 16 economists polled by Bloomberg predicted rates would remain unchanged but there had been a debate about whether the bank might alter its forecasts with emerging signs of inflation and a sharply weaker kiwi dollar than the bank expected.

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The bank's forecasts show the OCR rising to 1.9 percent in June 2019, three months earlier than its prior projection. A full rate increase, however, is still signaled in March 2020 when the benchmark rate is forecast to be 2 percent. Interest rates are also slightly higher at the end of the forecast period, rising to 2.1 percent in June 2020 versus a prior forecast of 2 percent. The key rate is seen at 2.3 percent in December 2020.

“The RBNZ’s forecast see – at the margin – a touch more risk of an earlier start to OCR increases, but fundamentally still a core view that the OCR is likely to remain on hold until around late 2019,” said ASB chief economist Nick Tuffley.

The bank was more aggressive regarding changes to its inflation and currency forecasts.

Spencer noted that annual CPI inflation was 1.9 percent in September but reiterated that "underlying inflation remains subdued". However, he no longer said that headline inflation is expected to decline in coming quarters.

The central bank lifted its forecast for inflation for the next two quarters, predicting annual consumer price index inflation of 1.8 percent in the December quarter and 1.5 percent in March 2018 quarter versus a prior forecast of 1.3 percent and 0.7 percent.

The central bank is mandated with keeping inflation in a 1 percent to 3 percent target band, with a focus on the midpoint. Inflation now reaches 2.1 percent in June 2018 versus a prior forecast of March 2019.

Among other things, Spencer noted that house price inflation has moderated and “low house price inflation is expected to continue, reinforced by new government policies on housing”.

On the dollar, which has fallen around 2.3 percent on a trade-weighted index basis since the new government was formed and is around 6 percent below where the bank forecast it would be in the September quarter, Spencer lowered the central bank's forecasts.

“The exchange rate has eased since the August Statement and, if sustained, will increase tradables inflation and promote more balanced growth," he said.

The bank now sees the TWI at 73.5 in the December quarter of this year, where it remains unchanged over the forecast period. It had previously seen it at 77.9 in the December quarter and 76.8 in December 2019.

On economic growth, Spencer was more upbeat than in the previous statement. He expects GDP growth to strengthen “with a weaker outlook for housing and construction offset by accommodative monetary policy, the continued high terms of trade, and increased fiscal stimulus”. In September he said that growth was expected to maintain its current pace going forward.

Gross domestic product grew 0.8 percent in the three months to June 30, from a revised 0.6 percent expansion in the March quarter and was 2.5 percent higher on the year. The central bank expects GDP to expand 0.7 percent in the September quarter and 0.9 percent in the December quarter.

The New Zealand dollar edged up after the statement and recently traded at 69.44 US cents from 69.25 cents immediately before its release.

(BusinessDesk)


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