RBNZ taking centre stage

It’s all eyes on the RBNZ right now. The past week saw the release of their latest consultation document on the treatment of investor property lending, and their March Monetary Policy Statement will be released at 9:00 am this Thursday.

With regards to the Monetary Policy Statement, we expect that the RBNZ will leave the OCR on hold at 3.5%. The accompanying press statement is expected to have a broadly neutral tone and signal that rates are likely to remain on hold for some time.

Central to what the RBNZ does this week is how they are viewing the outlook for inflation over the next couple of years. At the end of 2014, annual inflation fell to just 0.8%. Over the coming months we expect it to fall even further, reaching a low of around 0.2% and remaining outside the RBNZ’s target band for some time.

However, on its own, we don’t think that the current weakness in inflation is enough to prompt the RBNZ to shift to an easing bias. In large part, inflation is currently low as a result of sharp declines in international oil prices in late-2014. While these declines will weigh on annual inflation through 2015, they don’t imply a sustained reduction in inflation. In fact, oil prices have already bounced about 35% from their January lows, and this has been passing through to higher prices at the pump in recent weeks. Furthermore, interest rate reductions can do little to offset the effects of declines in oil prices that have already occurred, and hence would have only a limited impact on near-term inflation.