As expected, the Reserve Bank of New Zealand kept its key overnight cash rate (OCR) at 3.5 percent where it has been since July 2014. Once again the RBNZ called for a weaker New Zealand dollar (kiwi). Graeme Wheeler, the governor of the Reserve Bank of New Zealand, said that the kiwi is "unjustifiably high and unsustainable in terms of New Zealand's long-term economic fundamentals." The Bank's projections are consistent with a period of stability in the OCR. Future interest rate adjustments, either up or down, will be data dependent.
In its statement, the RBNZ noted that global financial conditions remain very accommodative, and are reflected in high equity prices and record low interest rates. However, volatility in financial markets has increased since late-2014 following the sharp drop in oil prices, continued uncertainty about the global outlook and US monetary policy and policy easings by a number of central banks. Growth remains robust in the US, but has slowed recently in China.
The bank noted that the domestic economy remains strong. "The fall in petrol prices has increased households' purchasing power and lowered the cost of doing business. Employment and construction activity are strong. Net immigration remains high, and monetary policy continues to be supportive. The housing market is showing signs of picking up, particularly in Auckland. However, there are a number of factors weighing on domestic growth, including drought conditions in parts of the country, fiscal consolidation, reduced dairy incomes and the high exchange rate."
"On a trade-weighted basis, the New Zealand dollar remains unjustifiably high and unsustainable in terms of New Zealand's long-term economic fundamentals. A substantial downward correction in the real exchange rate is needed to put New Zealand's external accounts on a more sustainable footing."
The Bank expects annual CPI inflation is expected to fall to around zero in the March quarter and remain low over 2015. This reflects the high exchange rate, low global inflation and the recent falls in petrol prices. "Inflation expectations appear to have fallen recently, and we will be closely monitoring the impact of this trend on wage and price setting behavior, especially in the non-traded sector."
Eight times a year, the Reserve Bank of New Zealand meets and decides whether to change or maintain New Zealand's Official Cash Rate. The RBNZ is known for its clarity regarding monetary policy intentions, thus the result is usually foreseen in advance. The decision aligns with the Reserve Bank of New Zealand's monetary policy to spur or slow economic growth or affect the exchange rate.
The RBNZ maintains an inflationary target range of 1 percent to 3 percent and will change rates to keep it within such a range, making rate decisions fairly predictable. Rate changes are significant nonetheless, affecting interest rates in consumer loans, mortgages, and bond rates. Increases or even expectations for rate increases tend to cause the New Zealand Dollar to appreciate, while rate decreases cause the currency to depreciate.
The RBNZ determines interest rate policy at it policy meetings. These meetings occur roughly every six weeks and are one of the most influential events for the markets. Market participants speculate about the possibility of an interest rate change. However, since the Bank is known for its clarity in setting policy, the result is usually built into the markets in advance. The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
Eight times a year.