New Zealand holds interest rate steady at record low

Violet Powell
May 11, 2017

The Reserve Bank lowered its projected track for the TWI, with the prospect of future interest rate hikes by the Federal Reserve reducing the kiwi's interest rate differential with other currencies, and deputy governor Grant Spencer told politicians the United States dollar component of those assumptions meant the New Zealand dollar would probably be in the low-60s U.S. cents level. Yet, it remained cautious over the "surplus capacity" and "extensive political uncertainty". "Longer-term inflation expectations remain well-anchored at around 2 per cent".

The kiwi fell to 68.34 United States cents as at 5pm in Wellington from 69.34 cents at 8am and 69.01 cents yesterday. The currency's 5 percent decline on a trade-weighted basis over the past three months is "encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector", Wheeler said. The RBNZ has kept its expected OCR track unchanged from the one in February, with the forecast at 1.8% through to September 2019, before rising to 2.0% in March 2020, where it now remains through June 2020. Those odds fell to 58 percent today. With inflation above target and the economy growing at a healthy clip, many see an interest rate hike in New Zealand's medium-term outlook. "However, the message from the RBNZ is clear: policy is set to remain on hold for a considerable period and it has no interest whatsoever in pre-empting a policy tightening".

Now banks were offering around 3.5 per cent interest for 1-2 year deposits, Bagrie said. "The banking sector is already doing the work for the RBNZ by lifting rates amidst stiff competition for deposits and that's a story that will continue". It was also the first time since 2011 the RBNZ achieved the mid-point of its 1-3% inflation target range.

"The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices", Mr Wheeler said. At the February policy statement, Wheeler said rates could go either way in the future with the looming prospect of new trade barriers creating too many uncertainties for the central bank.

New Zealand's economy expanded at a healthy clip through 2016, supported by record immigration and booming tourism and construction.

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Whatever the case, the timeframes involved are a year or more away and that is an eternity in financial markets, Tuffley said.

"Economic growth continues to be the envy of the G10, even if it is expected to slow to just below 3% in Q117 from 3.5% in Q416", remarked the analyst.

But Mr Wheeler said there were still uncertainties about the housing market and the global economy, which justified keeping interest rates on hold until 2019.

"As recent statistics show, while house prices have started cooling in Auckland and other larger cities, mortgage rates are starting to trend upwards", said George.

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