NZ: RBNZ Announcement

September 21, 2016 04:00 CDT

Consensus Actual Previous
change 0bp 0bp -25bp
Level 2.0% 2.0% 2.0%

As expected, the Reserve Bank of New Zealand has left its policy rate, the overnight cash rate (OCR), unchanged at 2.0 percent at today's meeting. However, the statement accompanying this decision again noted that more rate cuts will likely be needed in coming months to help push inflation back into the RBNZ's target range of 1.0 percent to 3.0 percent. The next scheduled policy meeting will take place in November.

Headline inflation has been below the target range since late 2014, reflecting falls in global oil prices, weaker prices for tradable goods, and a relatively strong local currency. In response to this weakness in price pressures, the RBNZ has cut the OCR five times since early 2015, most recently last month by 25 basis points to a record low of 2.0 percent.

Today's statement noted recent GDP data were consistent with officials' growth forecasts. They expect domestic activity will remain supported by accommodative monetary policy, strong net immigration, and robust conditions in the construction and tourism sectors. High house price inflation was again identified as a risk to financial stability, but officials noted that recent macro-prudential measures and tighter credit conditions might be starting to have an impact.

Officials expect consumer price inflation to weaken further this quarter but then rise from the end of the year in response to previous policy easing and strength in the domestic economy. Nevertheless, they again expressed concerns that the persistence of low inflation might dampen consumers' inflation expectations. Officials also again referred to recent upward pressure on the exchange rate, noting that this is weighing on both domestic activity and prices and arguing that the currency needs to weaken.

Reflecting this assessment, the statement repeated earlier advice that further policy easing will likely be required to push inflation back towards the middle of the target range. Inflation data for the three months to September will be published in mid-October and will likely play a major role in upcoming policy decisions.

Over the last twelve months, the RBNZ has tended to cut the OCR at every second or third policy meeting, suggesting there is a good chance of another move at the next meeting, scheduled for November. The chances of a rate cut in November are also enhanced by the fact that the next scheduled policy meeting will not take place until February 2017. Officials will also publish their quarterly monetary policy statement with revised forecasts at the November meeting.

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.