As expected the Reserve Bank of New Zealand left its key interest rate on hold this morning at 3.50%, but the bank is now more likely to cut rates than raise them.
"The timing of future adjustments in the OCR will depend on how inflationary pressures evolve in both the non-traded and traded sectors. It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target,“ the RBNZ said in the statement – so no rate move, and the balance is now on the downside and a rate cut if the economy slows, inflation remains weak and demand softens.
The new approach was flagged a week ago in a speech by assistant governor, Jon McDermott and this morning’s statement underlines the more accommodative stance
"Lower fuel prices, coming on top of the high exchange rate and low global inflation, lowered annual CPI inflation to 0.1 percent in the March quarter. Underlying inflation remains low and is expected to pick up gradually.
"Monetary policy will focus on the medium-term trend in inflation. The Bank expects to keep monetary policy stimulatory, and is not currently considering any increase in interest rates.
"We are watching closely the ongoing impact on tradables inflation from global forces and the high New Zealand dollar. On a trade-weighted basis, the New Zealand dollar continues to be unjustifiably high and unsustainable in terms of New Zealand’s long-term economic fundamentals.
“The appreciation in the exchange rate, while our key export prices have been falling, is unwelcome,” the key paragraphs of the statement read.
"The New Zealand economy continues to grow at an annual rate of around 3 percent, supported by low interest rates, high net immigration and construction activity, and the fall in fuel prices.
"House price inflation is elevated in Auckland. However, lower dairy incomes, lingering effects of drought, fiscal consolidation, and the high exchange rate are weighing on the outlook for growth. “
This statement is a big change from the one issued after the March decision to leave rates on hold.
Then the RBNZ was neutral, saying rates could go up or down and saying there would be no change until the start of 2017. Now the bank has soften that and a rate cut is more a possibility than at any time in the past couple of years, even with the ongoing property boom in Auckland.
