New Zealand's central bank left its benchmark Official Cash Rate (OCR) steady at 3.5 percent, as expected, and repeated its guidance from January that "future interest rate adjustments, either up or down, will depend on the emerging flow of economic data."
The Reserve Bank of New Zealand (RBNZ), which raised its rate by 100 basis points in 2014, added that it's central projection was consistent with a period of stability in the OCR, a slight change to January's statement when it said it it expected to keep the OCR on hold for some time.
But the RBNZ sharpened its language about the New Zealand dollar, known as the kiwi. While it repeated that it remains unjustifiably high and unsustainable in light of the country's economic fundamentals, it added that "a substantial downward correction in the real exchange rate is needed to put New Zealand's external accounts on a more sustainable footing."
This compares with January's statement when it said that it expected "further significant depreciation."
The kiwi appreciated from the global financial crises in March 2009 to July 2014 but since then it has been depreciating, with the fall accelerating since Jan. 19 this year when the RBNZ dropped its previous tightening bias.
The kiwi then resumed its rise during February but started falling this month. Today it rose sharply following the RBNZ's statement, quoted at 1.369 to the U.S. dollar compared with yesterday's 1.388, but was down 6.3 percent since the start of the year.
In addition to the stronger language about the kiwi, the RBNZ also seems to have become more concerned about the fall in inflation, saying inflation expectations appeared to have fallen and it would be "closely monitoring the impact of this trend in wage and price setting behaviour."
New Zealand's inflation rate fell further in the fourth quarter of 2014 to 0.8 percent from 1.0 percent in the third quarter, below the central bank's target of 2.0 percent, plus/minus 1 percentage point.
The RBNZ said it expects inflation to fall to around zero in the March quarter and remain low during the rest of this year due to the high exchange rate, low global inflation and the fall in petrol prices.
The Reserve Bank of New Zealand issued the following statement: