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New Zealand Monetary Policy May 2018

New Zealand: RBNZ keeps key rate on hold in May

At its 10 May meeting, the Reserve Bank of New Zealand (RBNZ) met market analysts’ expectations and kept the Official Cash Rate (OCR) unchanged at a record-low 1.75%, where it has been since November 2016. This was the first monetary policy meeting incorporating the new employment mandate and led by newly appointed governor Adrian Orr. The Central Bank now has a dual inflation-targeting and employment-maximization mandate that will guide its monetary policy.

The Central Bank’s decision was taken against a backdrop of robust economic growth and a tight labor market, with the latest data showing that the unemployment rate fell to a near one-decade low in Q1. On the price front, inflation dipped in the same period, moving further below the Bank’s 2.0% target, on weak food and import prices, and subdued wage growth. The RBNZ assessed that lowering rates to bring inflation up to target more quickly could lead to unnecessary volatility in output and employment. Conversely, hiking rates would risk halting the expected pick-up in employment and inflation. Overall, the Bank expects that rising capacity constraints will prompt inflation to gradually return to target in the medium term, motivating its decision to stay put.

Looking ahead, the Bank highlighted in its official statement that monetary policy will remain accommodative “for a considerable period of time”. However, it maintained neutral forward guidance, stating that “the direction of our next move is equally balanced, up or down.” 

Some FocusEconomics panelists are penciling in some mild monetary tightening later this year, although most see the Bank waiting until 2019 to raise rates. Commenting on the RBNZ’s policy direction, Scott Nicholls, New Zealand Economist at Oxford Economics, noted:

“The official cash rate has been maintained at 1.75% since the end of 2016 and we continue to expect that, with inflation staying low in early 2018, monetary policy will not be tightened before Q3 this year”.

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