New Zealand Monetary Policy September 2016

New Zealand

New Zealand: Official Cash Rate unchanged at record low in September, further cuts on the horizon

September 22, 2016

At its meeting held on 22 September, the Reserve Bank of New Zealand (RBNZ) decided to keep the Official Cash Rate (OCR) at 2.00%. The OCR has remained at the lowest level on record since the RBNZ cut the rate in August. The Bank aims to bring inflation closer to the middle of the 1.0%-3.0% target range against a backdrop of heightened economic uncertainty and low commodity prices.

In its accompanying statement, the Reserve Bank said that the global economic outlook remains weak despite unprecedented monetary stimulus in many countries. Volatility in global markets has increased in recent weeks and is reflected by rising government bond yields and equities. Political uncertainty remains pervasive across the world and the prospects for global growth and an increase in commodity prices are still highly uncertain. Having said this, low commodity prices and excess capacity in many economies are suppressing global inflation.

In its assessment of the local economy, the Bank said that Q2 national accounts figures were broadly in line with its expectations. The Bank expects the economy to perform robustly on the back of strong net immigration, construction activity, tourism and accommodative monetary policy by the RBNZ. Despite the bright outlook, the country is under pressure from a host of factors. Dairy prices for the full season remain uncertain and high net immigration is suppressing wage growth. Lastly, elevated housing prices pose a risk to financial stability in the country.

The latest inflation data show that headline inflation remains below the RBNZ’s target band. Inflation is expected to drop further in the third quarter due to lower prices for fuel and cuts in Accident Compensation Corporation (ACC) levies. In the last quarter of the year, inflation is expected to rise on the back of the current accommodative monetary policy and a solid domestic economy. The Bank, however, did not rule out that inflation expectations could be lowered going forward due to “sustained weakness in headline inflation”.

The Central Bank, however, remarked that the current easing stance has resulted in a strengthening of the New Zealand dollar and hinders its attempt to raise inflation. According to the RBNZ, “weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate,” putting pressure on the country’s exports and suppressing import inflation.

Going forward, the Bank maintained its dovish stance. The RBNZ said that “further policy easing will be required to ensure that future inflation settles near the middle of the target range.”

The next meeting will be held on 10 November.

FocusEconomics panelists expect that the OCR will end 2016 at 1.82%. For 2017, participants see the interest rate ending the year at 1.69%.


Author: Jean-Philippe Pourcelot, Economist

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New Zealand Monetary Policy Chart


New Zealand Monetary Policy September 2016 0

Note: Official Cash Rate (OCR) in %.
Source: Reserve Bank of New Zealand.


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