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New Zealand Monetary Policy March 2018

New Zealand: RBNZ keeps key rate unchanged in March, announces changes to policy mandate

At its meeting on 22 March, 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 data revealed that GDP growth was weaker than expected in Q4 2017, largely because of adverse weather conditions hampering agricultural production. On the price side, inflation is likely to have dipped in the first quarter of this year, moving further below the Bank’s 2.0% target, on recent changes to university fees, and weak food and energy prices. With mediocre growth and soft price pressures, the Bank once again decided it was too early to begin raising rates.

Shortly after the meeting, the RBNZ announced immediate changes to the policy mandate—in line with the new government’s desire to ensure the Bank places more emphasis on developments in the real economy. The inflation target of 2.0% within a 1.0%–3.0% tolerance band remains unchanged, but the RBNZ will now incorporate maximizing employment as part of its decision-making process. The reform is unlikely to lead to meaningful changes to monetary policy—at least in the short to medium-term—as the Bank already takes into consideration employment and output when determining the policy rate, albeit in a less explicit way.

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 agree, and they see inflation back at around 2.0% by the end of 2018. Under this scenario, some panelists are penciling in some mild monetary tightening later this year, although most see the Bank waiting until 2019 to raise rates.

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