NZ: RBNZ Announcement

Wed Feb 07 14:00:00 CST 2018

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 late 2016. 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 notes global economic conditions have continued to improve. Although domestic growth moderated in the second half of 2017, officials continue to believe that supportive monetary and fiscal policy will drive a pick-up in activity. Compared with their earlier estimates, however, officials now expect growth will be weaker in the near term but stronger in the medium term, mainly reflecting a reassessment of the likely impact of the new government's economic policies.

Headline inflation fell from 1.9 percent in the three months to September to 1.6 percent in the three months to December, below 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 remain subdued 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 trend upward towards 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.

The RBNZ's next policy meeting, scheduled for mid-March, will be the last chaired by Acting Governor Grant Spencer, with his replacement, Adrian Orr, set to take over at the end of March. The New Zealand government has undertaken to sign a new policy target agreement with the RBNZ when the current agreement expires in March, but has also advised that proposed legislative changes will likely result in changes to the agreement after that. The government, elected last year, is currently reviewing New Zealand's monetary policy framework, having advocated before the election adding an employment objective to the existing inflation target as part of the RBNZ's mandate.

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.