New Zealand Holds Interest Rate Steady At 1.75%


The Reserve Bank of New Zealand kept its official cash rate unchanged at record low of 1.75 percent on August 9th of 2017, as widely expected. The central bank last moved the key rate in November of 2016. Policymakers underscored that major challenges remain with persistent surplus capacity and extensive political uncertainty. They also mentioned soft GDP growth in the last quarter was lower than expected, although it is expected to improve going forward. The central bank also stated that monetary policy will remain accommodative for a considerable period, as numerous uncertainties remain and policy may need to adjust accordingly. 

Statement by Reserve Bank Governor Graeme Wheeler:

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.

Global economic growth has become more broad-based in recent quarters.  However, inflation and wage outcomes remain subdued across the advanced economies, and challenges remain with on-going surplus capacity.  Bond yields are low, credit spreads have narrowed and equity prices are at record levels.  Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has increased since the May Statement, partly in response to a weaker US dollar. A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth.

GDP in the March quarter was lower than expected, adding to the softening in growth observed at the end of 2016.  Growth is expected to improve going forward, supported by accommodative monetary policy, strong population growth, an elevated terms of trade, and the fiscal stimulus outlined in Budget 2017.

House price inflation continues to moderate due to loan-to-value ratio restrictions, affordability constraints, and a tightening in credit conditions.  This moderation is expected to persist, although there remains a risk of resurgence in prices given continued strong population growth and resource constraints in the construction sector.

Annual CPI inflation eased in the June quarter, but remains within the target range.  Headline inflation is likely to decline in coming quarters as the effects of higher fuel and food prices dissipate.  The outlook for tradables inflation remains weak.  Non-tradables inflation remains moderate but is expected to increase gradually as capacity pressure increases, bringing headline inflation to the midpoint of the target range over the medium term.  Longer-term inflation expectations remain well anchored at around 2 percent.

Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain and policy may need to adjust accordingly.

Mario | mario@tradingeconomics.com
8/9/2017 9:08:24 PM