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New Zealand Monetary Policy March 2019

New Zealand: RBNZ leaves OCR unchanged in March despite dovish turn

At its second meeting of the year, on 27 March, the Reserve Bank of New Zealand (RBNZ) left the official cash rate (OCR) unchanged at a record low of 1.75%, where it has been since November 2016. However, the board highlighted that the next OCR move will likely be a downwards revision. The increased dovishness of the statement took analysts by surprise and prompted a fall of the kiwi against the U.S. dollar on Wednesday.

In its communiqué, the RBNZ pointed out that a “supportive monetary policy” is still needed to push core inflation towards the 2.0% target. Despite labor market tightness, domestic demand slowed at the back end of 2018 amid a cooling housing market and increasingly negative business sentiment. A low OCR is thus deemed necessary to spur private consumption and fixed investment, in order to stoke underlying consumer prices.

Looking ahead, the RBNZ remarked that, “the more likely direction of our next OCR move is down”, in order to stir the domestic economy, against the backdrop of a global slowdown. In addition, the recent dovish turn taken by the Central Banks of key trading partners has put “upwards pressure on the New Zealand dollar”, thus opening room for a rate cut. The board expects that capacity constrains will stoke price pressures and push inflation towards the target rate.

Commenting on the RBNZ’s decision, Andrew Ticehurst, interest rate strategist at Nomura, noted:

“Today, it [The RBNZ] managed to wrong-foot market participants again with its new-found dovishness. Market participants likely expected a softer tone today, given weaker global growth, a slight undershoot on NZ Q4 GDP and a stronger NZD over the intervening period […] We now look for a 25bp rate cut from RBNZ in August, based in part on our view that the RBA (Reserve Bank of Australia) will have moved by this time.”

The next monetary policy meeting is scheduled for 8 May.

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