RBNZ: No fireworks offered – Westpac

The Reserve Bank of New Zealand kept the Official Cash Rate on hold at 1.75%, and made few changes to its forecasts or its guidance on future monetary policy, notes the analysis team at Westpac.

Key Quotes

“Monetary policy is expected to remain accommodative for a long time, in order to support growth and guide inflation towards the RBNZ’s target on a sustained basis.”

“We had expected a slightly softer tone from the RBNZ given the weaker balance of economic data over the last few months. Financial markets had started to lean in that direction as well over the last week. However, while the RBNZ acknowledged the recent softer data, it held the line on just about every aspect of its forecasts. The projected OCR path was identical to the May Monetary Policy Statement, with a flat track for the next two years before a gentle upturn.”

“Weak global inflation pressures and a high New Zealand dollar mean that tradables inflation is expected to remain soft. That puts the burden on higher domestically generated inflation, in order to keep overall inflation on target. The RBNZ believes that low interest rates will achieve this, but that they need to be given time to do their work. On that basis, market expectations for OCR hikes in the second half of 2018 seem misplaced.”

“We’ve been broadly in agreement with the RBNZ’s view for some time. If anything, we’re less confident that the economy is on track for above-trend growth and higher non-tradables inflation. Our GDP growth forecasts for the next few years are below the RBNZ’s, and we’re more inclined to believe that the current slowdown in the housing market will persist.”

“For that reason, we’re pushing out our forecasts for the timing of OCR hikes, which were already at the far end of the range of market forecasts. Previously, we expected the first hike to be delayed until the March quarter of 2019; we now expect it to be in the December quarter of that year. As we’ve noted before, it’s hard to be specific about dates over this sort of time horizon; the key point is that we believe OCR hikes are much further away than the market thinks.”