As anticipated, the Reserve Bank of New Zealand left its official cash rate (OCR) unchanged at 3.5 percent where it has been since July 2014. In his statement, Reserve Bank Governor Graeme Wheeler noted that the RBNZ is not considering a rate increase and will monitor carefully cutting the OCR if demand weakens. The Bank will continue to monitor and carefully assess the emerging flow of economic data.
He further noted that the New Zealand economy continues to grow at an annual rate of around 3 percent, supported by low interest rates, high net immigration and construction activity along with the decline in fuel prices. House price inflation is elevated in Auckland. However, lower dairy incomes, lingering effects of drought, fiscal consolidation and the high exchange rate are weighing on the outlook for growth.
The RBNZ said that growth among its trading partners continues at around its long term average but remains dependent on highly accommodative monetary settings. Policy interest rates are at record lows and many European government bonds are trading at negative yields. Looking ahead, considerable uncertainties exist in Europe, China and Australia, and on the timing of U.S. monetary policy adjustment.
The RBNZ governor said that the New Zealand dollar on a trade-weighted basis continues to be unjustifiably high and unsustainable in terms of New Zealand's long-term economic fundamentals. "The appreciation in the exchange rate, while our key export prices have been falling, is unwelcome."
The timing of future adjustments in the OCR will depend on how inflationary pressures evolve in both the non-traded and traded sectors. It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target.
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.