As widely expected, the Reserve Bank of New Zealand (RBNZ) has held the official cash rate (OCR) at 1.75%.
The release accompanying the decision was basically a carbon copy of the February statement, with RBNZ governor Graeme Wheeler noting that the OCR is likely to remain on hold for an extended period:
Macroeconomic indicators in advanced economies have been positive over the past two months. However, major challenges remain with on-going surplus capacity in the global economy and extensive geo-political uncertainty.
Global headline inflation has increased, partly due to a rise in commodity prices, although oil prices have fallen more recently. Core inflation has been low and stable. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.
The trade-weighted exchange rate has fallen 4 percent since February, partly in response to weaker dairy prices and reduced interest rate differentials. This is an encouraging move, but further depreciation is needed to achieve more balanced growth.
Quarterly GDP was weaker than expected in the December quarter, but some of this is considered to be due to temporary factors. The growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity. Dairy prices have been volatile in recent auctions and uncertainty remains around future outcomes.
House price inflation has moderated, and in part reflects loan-to-value ratio restrictions and tighter lending conditions. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.
Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. Headline CPI will be variable over the next 12 months due to one-off effects from recent food and import price movements, but is expected to return to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.
Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.
As noted above, Wheeler applauded the devaluation of the New Zealand Dollar and noted that further depreciation in required. He also largely ignored the weak Q4 GDP result, pinning the blame on “temporary factors”. Wheeler also noted the recent moderation in the housing market due to macroprudential curbs, but is worried it the market may re-accelerate given record immigration and the weak supply response.
