As expected, the Reserve Bank of New Zealand has left its policy rate, the overnight cash rate (OCR), unchanged at 1.75 percent, a record low. This rate has been cut seven times since mid-2015, most recently at the last meeting in November, but officials noted then that they expected current policy settings will be accommodative enough to get inflation back to its target range of 1.0 percent to 3.0 percent.
Today's decision follows the release last month of inflation data for the three months to December. Headline CPI rose by 1.3 percent year-on-year, accelerating strongly from 0.2 percent in the three months to September. This was the first time headline inflation had been back in its target range since late 2014. The statement accompanying the RBNZ decision today noted that the increase in headline inflation partly reflected base effects as the impact of previous declines in oil prices dropped out of calculations. Officials expect inflation will "gradually" return to 2.0 percent, the mid-point of the target range, reflecting their view that inflation expectations remain well-anchored around that level.
Officials are now more confident about the global outlook and note that higher commodity prices have pushed up global inflation. They are also positive about the outlook for the domestic growth outlook, with low policy rates offsetting the impact of what they still consider to be an over-valued domestic currency.
After the policy rate was cut in November, officials advised that they expected policy settings would result in sufficiently strong growth to have inflation settle near the mid-point of the target range. Today's decision shows that the RBNZ remains confident that these policy settings are still appropriate and will likely remain so for some time, with the statement noting that policy will be kept accommodative "for a considerable period".
Looking further ahead, officials have revised up their forecast for the cash rate slightly. Previously they had forecast the rate to remain unchanged until late 2019 but now they project a small increase to around 1.9 percent by late 2019 and to 2.0 percent by early 2020. Nevertheless, it is clear that for the time being officials expect to keep policy stable. The next scheduled policy review will take place in late March.
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.