NZ: RBNZ Announcement

Wed Jun 27 16:00:00 CDT 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.

In the statement accompanying today's decision, officials argue that their previous assessment of the outlook for the New Zealand economy "remains intact". Nevertheless, they note that trade tensions represent a risk to global economic growth while slower-than-expected domestic growth earlier in the year suggests there is more spare capacity in the economy than they previously anticipated. Looking forward, officials also expect that government spending will provide less support to domestic growth than previously anticipated. Turning to the outlook for consumer prices, officials forecast headline CPI inflation will rise in the near term in response to higher fuel prices and then gradually increase towards the mid-point of the RBNZ's target range of 1.0 percent to 3.0 percent.

Based on this assessment, officials consider that "supportive monetary policy" will be required "for some time to come" with policy rates expected to remain "at an expansionary level for a considerable period". The statement also indicates again that the next move in policy rates could be higher or lower, with officials arguing they are well positioned to manage change in either direction.

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.