Hold the line

The Reserve Bank left the Official Cash Rate unchanged at 1.75% last week, as was widely expected. Overall, there was little in the accompanying statement to suggest any shift in the RBNZ’s thinking relative to its February Monetary Policy Statement or the Governor’s speech earlier this month.

The bottom line is that the RBNZ expects the cash rate to remain low for a considerable period (the forecasts published in February suggested no change until late 2018). The outlook for the New Zealand economy remained positive, but the risks around the global environment were seen to the downside.

On the latter, geopolitical risks are certainly a concern, but not the only one. RBNZ Governor Wheeler has already spelled out his concerns about Trump’s policy agenda and the potential impact on New Zealand, and nothing has changed in recent weeks to allay those concerns. But the RBNZ also highlighted the economic aspects: there is still significant excess capacity in the global economy, and core inflation (excluding oil price movements) remains low and stable. The implication is that imported inflation is still seen as largely absent.

In contrast to the international picture, the RBNZ is still positive on the local economy, which is being supported by strong population growth, building activity and low interest rates. The RBNZ noted the weaker than expected December quarter GDP outturn, but attributed it to temporary factors.

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