NZ: RBNZ Announcement

Wed Sep 27 15:00:00 CDT 2017

Consensus Actual Previous
change 0bp 0bp 0bp
Level 1.75% 1.75% 1.75%

As widely expected, the Reserve Bank of New Zealand kept its Official Cash Rate (OCR) unchanged at 1.75 percent where it has been since November 2016.

In its statement, acting governor Grant Spencer said that monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.

Regarding the domestic economy, Spencer said that the trade-weighted exchange rate has eased slightly since the August Statement. However, a lower New Zealand dollar would help to increase tradables inflation and deliver more balanced growth.

GDP in the June quarter grew as anticipated following relative weakness in the previous two quarters. While exports recovered, construction was weaker than expected. Growth is projected to maintain its current pace going forward, supported by accommodative monetary policy, population growth, elevated terms of trade and fiscal stimulus.

It was also noted that house price inflation continued to moderate and was expected to continue due to loan-to-value ratio restrictions, affordability constraints and a tightening in credit conditions. However, there still remains a risk of resurgence in prices given population growth and resource constraints in the construction sector.

Annual CPI inflation eased in the June quarter, but remains within the RBNZ's target range. Headline inflation is expected to decline in coming quarters, reflecting volatility in tradables inflation. Non-tradables inflation remains moderate but is expected to increase gradually as capacity pressure increases

Regarding global economic growth, the RBNZ said has continued to improve in recent quarters. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

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.