New Zealand: After cut in March, Reserve Bank of New Zealand holds rate in April
April 28, 2016
At its meeting held on 28 April, the Reserve Bank of New Zealand (RBNZ) decided to leave to the Official Cash Rate (OCR) unchanged at 2.25%, which was a decision expected by the markets. The Central Bank’s decision follows an unexpected 25 basis-point rate cut in its previous meeting. In March, the Central Bank cut the OCR and indicated that, “further policy easing may be required.”
Although the RBNZ refrained from cutting rates further in April, it maintained a strong dovish stance. In its statement, the Central Bank warned that the outlook for global growth has deteriorated and that prices for some commodities remain very low. Moreover, the Bank recognized that, “the exchange rate remains higher than appropriate given New Zealand’s low commodity export prices” and regarding consumer price developments the RBNZ stated that, “headline inflation remains low, mostly due to low fuel and other import prices.”
Judging the domestic developments, the Central Bank maintained its view of the current growth drivers. Authorities continue to see that economic growth is being supported by strong inward immigration, a healthy tourism sector and accommodative monetary policy. Moreover, the Bank recognized that dairy prices have improved recently, although they are still below break-even levels for producers. Regarding the housing market, the Bank remains preoccupied about a pick-up in house price inflation and subdued supply of housing. Meanwhile, regarding external developments, the Central Bank stated that the outlook remains weak, but no more so than before.
Overall, the RBNZ remains concerned about the outlook for inflation as well as inflation expectations. According to the Bank, the outlook now is for inflation “to strengthen as the effects of low oil prices drop out an as capacity pressure gradually builds." However, the RBNZ pointed out that the monetary policy will continue to be accommodative and further policy easing may be required to ensure that inflation returns near the middle of the target range.
Author: Ricardo Aceves, Senior Economist