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New Zealand Monetary Policy February 2018

New Zealand: RBNZ keeps key rate unchanged in February

At its meeting on 8 February, 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.

The Central Bank’s latest decision came soon after the Statistical Institute revealed that inflation fell in Q4, moving further from the midpoint of the Bank’s 1.0%–3.0% target range. Core inflation was also subdued. In addition, the NZD has appreciated against the USD in recent months, which could reduce import price pressures early this year, while household lending has cooled somewhat. On the demand side, the Bank judged that economic growth is expected to have eased in H2, while wage inflation remained modest in the last quarter of 2017. In addition, the RBNZ revised down its growth forecasts slightly for the next two fiscal years, on the back of a recalibration of the near-term impact of the new government’s fiscal policies. To ensure inflation does not settle below the midpoint of the target range, and to support the economy, the RBNZ opted to stay put.

In its communiqué, the Bank highlighted that monetary policy is likely to remain accommodative going forward for a “considerable period”. The RBNZ expects inflation to gradually return to the target midpoint in the medium term on rising capacity pressures. FocusEconomics panelists concur with this analysis, and see inflation back at around 2.0% by the second half of the year. Under this scenario, some panelists are penciling in some mild monetary tightening later this year, although rates will remain low by historical standards.

New Zealand Interest Rate Forecast

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