The New Zealand dollar rallied by about US1c after the Reserve Bank opted to keep its official cash rate at 2.25 per cent, with the market perceiving the bank’s statement as being less “dovish” than many had expected.
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Governor Graeme Wheeler has indicated that future reductions are still possible.
Mr Wheeler said further policy easing “may be required” to push inflation back into the middle of the bank’s target band.
But, he said, the bank expected inflation to strengthen with low interest rates, hikes in fuel and other commodity prices, an expected depreciation in the New Zealand dollar and some increase in capacity pressures. “A lower New Zealand dollar would raise tradables inflation and assist the tradables sector”, The governor said this morning.
Subdued inflation remains a concern in New Zealand, as it is in Australia and across large parts of the world.
On Friday, a survey by Bloomberg showed 13 of 15 economists predicting that if Wheeler did not cut on Thursday, he would cut at the next meeting in August. The central bank now sees inflation reaching 2 percent in the fourth quarter (4Q) of 2017 instead of the first quarter (1Q) of 2018 previously forecasted. Auckland house prices in particular are at very high levels, and additional housing supply is needed. “After falling in recent quarters, short-term inflation expectations appear to have stabilised”, said Wheeler. It also cited stable inflation, continued inflow of immigration and pressures in the housing market for standing pat on the monetary policy. The RBNZ is one of the few central banks that can actually weaken its currency via rate cuts as it has a fairly steep yield curve and the highest starting monetary policy rate.
The kiwi touched a month-high of 69.84USc overnight and was trading at 69.69USc at 8am in Wellington, from 69.24USc at 5pm yesterday. Low dairy prices are a “moderating influence” on growth, it said.
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Domestic activity continues to be supported by strong net immigration, construction, tourism and accommodative monetary policy.
