The Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at 2.25% following the latest policy meeting. This was in line with the consensus forecast, but a minority of banks had called for a rate cut and the New Zealand dollar moved sharply higher. Policy decisions will become even tougher for the bank over the second half of 2016 unless the Fed moves to raise US interest rates.
According to the RBNZ, domestic activity is being supported by inward migration, construction and tourism. Global financial market volatility has abated in the bank’s view, but the international economy remains weak and there are still a high number of uncertainties surrounding the outlook.
The exchange rate was described as higher than appropriate given New Zealand’s low export commodity prices and the high New Zealand dollar, together with weak overseas inflation is holding down the inflation rate in tradable goods.
According to the RBNZ, long-term inflation expectations are well-anchored at 2% and short-term inflation expectations appear to have stabilised. The stability in inflation expectations is likely to have been a key factor keeping the RBNZ on hold at this meeting.
The central bank also warned that house-price inflation in Auckland and other regions is adding to financial stability concerns and this will have been another barrier to cutting rates.
As at the April meeting, the RBNZ warned that further policy easing may be required to ensure that average inflation settles near the middle of the target range.
Since then, the New Zealand dollar weakened during May before rebounding stronger during June to trade at levels stronger than those before the April 27th meeting. The central bank will certainly remain uneasy over exchange rate trends, especially with dairy prices still under pressure.
The New Zealand dollar spiked higher following the release give that there had been some expectations of a rate cut. From levels, around 0.7020 in NZD/USD, there was an immediate jump to the 0.7100 area and further currency gains would increase the potential for a rate cut at the August meeting. The RBNZ will, however, be in an increasingly difficult position if house prices rise further and would have to consider tighter lending standards.
Written with assistance from Tim Clayton from EconomicCalendar.com