The Reserve Bank of New Zealand (RBNZ), which shifted into a neutral stance in November last year following a rate cut, confirmed its previous guidance that there are numerous uncertainties, particularly on the international front, and "policy may need to adjust accordingly."
In an update to its forecast, the RBNZ said the OCR rate would remain at its current level through June 2018 and then rise to 1.9 percent in September 2019 and then to 2.0 percent in March 2020.
In its policy report from November, the central bank forecast the OCR rate would be lowered to 1.7 percent from 1.8 percent in June this year and then remain at that level through December 2019.
The RBNZ shifted into an easing cycle in June 2015 and cut the rate by a total of 175 basis points, ending with a 25-point cut in November.
Underlying the slight increase in the expected key rate, the RBNZ said inflation had now returned to its target band of 1-3 percent as the drop in oil prices has dropped out of the calculation and is expected to return to the midpoint due to the strength of the economy despite the impact of the strong exchange rate of the New Zealand dollar, known as the kiwi.
But the RBNZ pushed back its forecast for annual inflation to hit 2.0 midpoint target to June 2019 from December 2018. By December 2019 inflation is seen averaging 2.1 percent, later than its previous forecast of March 2019.
In the fourth quarter of last year New Zealand's inflation rate jumped to 1.3 percent from 0.4 percent in the previous three quarters.
As in recent quarters, the RBNZ again voiced its displeasure with the strength of the kiwi, once again saying it remains higher than is sustainable for balanced growth and "a decline in the exchange rate is needed."
The kiwi began depreciating in July 2014 and fell to a low of almost 1.60 to the U.S. dollar in September 2015, a level not seen since 2009.
But since then, it has firmed though it fell in response to the RBNZ's statement. The kiwi was trading at 1.389 to the U.S. dollar today, down from 1.369 yesterday, but up from 1.44 at the start of this year.
The Reserve Bank of New Zealand issued the following statement by its governor, Graeme Wheeler:
"The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.
The recovery in commodity prices and more positive business and consumer sentiment in advanced economies have improved the global outlook. However, major challenges remain with on-going surplus capacity in the global economy and rising geo-political uncertainty.
Global headline inflation has increased, partly due to rising commodity prices. Global long-term interest rates have increased. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.
New Zealand’s financial conditions have firmed with long-term interest rates rising and continued upward pressure on the New Zealand dollar exchange rate. The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed.
Economic growth in New Zealand has increased as expected and is steadily drawing on spare resources. The outlook remains positive, supported by ongoing accommodative monetary policy, strong population growth, increased household spending and rising construction activity. Dairy prices have recovered in recent months but uncertainty remains around future outcomes.
Recent moderation in house price inflation is welcome, and in part reflects loan-to-value ratio restrictions and higher mortgage rates. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.
Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. Inflation is expected to return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradables inflation. Longer-term inflation expectations remain well-anchored at around 2 percent.
Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."
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