NZ: RBNZ Announcement

Wed Nov 08 14:00:00 CST 2017

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

The Reserve Bank of New Zealand has left its policy rate, the overnight cash rate (OCR), unchanged at a record low of 1.75 percent, in line with the consensus forecast. This rate has been unchanged since a 25 basis point cut last November. Officials also repeated their assurance that policy will remain accommodative "for a considerable period", suggesting that the stability in the cash rate seen over the last twelve months is set to continue in the months ahead.

The statement accompanying today's decision points to continued improvement in global economic conditions and also that the domestic currency has depreciated in the last few months. If sustained, officials expect this currency move will put upward pressure on inflation and help promote better balanced growth in the domestic economy. Officials expect growth to strengthen over the forecast period, reflecting accommodative monetary policy and the prospect of increased fiscal stimulus after the establishment last month of a new government led by the Labour Party. At today's meeting officials considered the impact of various policies proposed by the new government but noted that their impact for now remains very uncertain.

Headline inflation rose from 1.7 percent in the three months to June to 1.9 percent in the three months to September, close to the the mid-point of the RBNZ's target range of 1.0 percent to 3.0 percent. Today's statement notes that inflation for tradable goods and services is likely to moderate over the forecast period while inflation for non-tradable goods and services is expected to strengthen, with the net effect that headline inflation is expected to remain close to the mid-point of the target range.

Today's statement again notes that uncertainties remain and policy adjustments may be required in some circumstances, but there is little to suggest that officials see any case for a change in the near-term. RBNZ forecasts assume the cash rate will remain near its current levels until mid-2019 at least.

In the medium-term, however, there remains some uncertainty about the framework for monetary policy. The new government agreed this week to renew the existing policy targets agreement it has with the RBNZ, directing officials to continue targeting inflation within the 1.0 percent to 3.0 percent range. This agreement, however, expires in March 2018 when the Acting Governor of the RBNZ, Grant Spencer, steps down. Ahead of the election, the Labour Party proposed adding an employment objective to the RBNZ's mandate, while its coalition partner, the New Zealand First Party, advocated an exchange rate target. The new Finance Minister, Grant Robertson, has announced a review of the RBNZ's mandate but also indicated that an exchange rate target is not being considered.

Speaking after the decision, Acting Governor Spencer argued that changing the RBNZ mandate to incorporate an employment objective would make no difference to the current policy stance and would also likely have little impact on policy settings over time. He noted, however, that such a change in the mandate would likely mean that the RBNZ would tolerate greater volatility in inflation,

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.