RBNZ Keeps Key Rate at Record Low on Weak Inflation Outlook

RBNZ Keeps Key Rate at Record Low on Weak Inflation Outlook

The kiwi initially gained when central bank Governor Graeme Wheeler kept the official cash rate at 1.75 percent with future projections unchanged, disappointing some economists who had expected him to signal rate hikes would come even later than previously forecast.

The kiwi traded at 73.09 USA cents as at 5pm in Wellington from 73.26 United States cents as at 8am in Wellington from 73.16 cents late yesterday.

"Nevertheless, we still expect the RBNZ will end up lifting the OCR slightly earlier than its forecasts imply" as it is underestimating the stimulatory impact of the recovering dairy sector and the price pressures generated by record immigration, they said in a research note.

Despite the RBNZ's dovish stance on rates, the kiwi dollar in trade weighted terms has been on the rise, a concern for the central bank since it is likely to put downward pressure on prices. Numerous uncertainties remain, and policy may need to adjust accordingly.

Monetary policy will remain accommodative for a considerable period. "Markets were primed for something slightly more dovish".

Labour productivity shrank 0.1 percent in the 2017 March year after contracting 0.2 percent in 2016, although the central bank predicts it will hit 0.9 percent by 2020, the end of its forecast horizon, which would be the highest level since 2011.

The kiwi's strength is a headache for the RBNZ because it damps import prices and suppresses inflation.

After posting some of the fastest growth among advanced economies in recent years, there are tentative signs the economy is losing momentum: it grew less than expected in the first quarter, inflation slowed more than forecast in the second quarter, and employment unexpectedly contracted.

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Wheeler said growth is "expected to improve going forward", supported by low borrowing costs, strong population growth, an elevated terms of trade and fiscal stimulus.

According to RBNZ policy makers, global economic growth increased and became more broad-based but wage growth subdued due to surplus capacity.

"Headline inflation is likely to decline in coming quarters as the effects of higher fuel and food prices dissipate", Wheeler said.

He stressed, however, that neither was there any need to reduce interest rates after keeping them at a record low for the fifth consecutive policy review.

The RBNZ, which targets inflation of 2 per cent over the medium term, now projects it won't raise rates for two years, even as the economy expands more than 3 per cent a year.

That's at least partly due to lending restrictions introduced by Wheeler, whose five-year term as governor ends September 26.

On the macroeconomic developments, RBNZ acknowledged that recent GDP growth came in weaker than expected, while housing prices moderated and inflation softened.