The Reserve Bank of NZ has held its key interest rate steady and left other support measures unchanged after its latest monetary policy meeting at which it appears to have backed off moves to take rates negative.
The central bank left the official cash rate of 0.25% and said it would also keep its $NZ100 billion quantitative easing programme and $NZ28 billion Funding for Lending scheme in place and unchanged, saying it saw “a prolonged monetary stimulus” as necessary.
The RBNZ meeting came after credit ratings agency S&P Global upgrades New Zealand’s credit rating – the first for any country since the global coronavirus pandemic started a year ago.
S&P Global raised the ratings of New Zealand’s foreign and local currency government debt by a notch to ‘AA+’ and ‘AAA’, respectively, from ‘AA’ and ‘AA+’. The rating is still just below Australia’s AAA negative from S&P.
The upgrade confirms the management of the economy by the RBNZ and the Arden government has placed the country’s economy on a positive trajectory
Wednesday’s statement from the central bank confirmed the improved outlook, saying
“Economic activity in New Zealand picked up over recent months, in line with the easing of health-related social restrictions.
“Households and businesses also benefitted from significant fiscal and monetary policy support, bolstering their cash-flow and spending. International prices for New Zealand’s exports also supported export incomes, although the New Zealand dollar exchange rate has offset some of this support.
“Some temporary factors were currently supporting consumer price inflation and employment. These one-off factors include higher oil prices, supply disruptions due to trade constraints, the recent suite of supportive fiscal stimulus, and a spending catch-up following the easing of social restrictions.”
But it pointed out there was still going to be some time before the vaccinations for Covid kicked in and started having a positive impact on sentiment and activity.
The bank said the “economic outlook ahead remains highly uncertain, determined in large part by any future health-related social restrictions. This ongoing uncertainty is expected to constrain business investment and household spending growth.”
“The Committee agreed that inflation and employment would likely remain below its remit targets over the medium term in the absence of prolonged monetary stimulus.
“The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained at the 2 percent per annum target midpoint, and that employment is at or above its maximum sustainable level. Meeting these requirements will necessitate considerable time and patience.”
And instead of talking about the looming deadline for work on taking official rates negative (as it did in 2020), the RBNZ has softened its commentary, saying in the latest statement:
“The Committee agreed that it remains prepared to provide additional monetary stimulus if necessary and noted that the operational work to enable the OCR to be taken negative if required is now completed.”
It is clear from the S&P upgrade and the improving economic conditions (and higher world prices for many NZ commodities such as dairy, meat and timber) the need for negative rates is passing. Inbound tourism and education remain the only major negatives.
Some NZ branches of Australia’s big banks (the Commonwealth and Westpac) are now talking about a possible rise in interest rates next year, and Westpac has not ruled out the chance of the economy slipping back into a mild recession if unemployment rises and there are more lockdowns.
