Reserve Bank keeps OCR at 1.75 per cent


RBNZ Governor Graeme Wheeler, in his last MPS before he retires, is expected to keep the official cash rate unchanged at 1.75 per cent on Thursday morning and traders will be more focused on the bank's projections for interest rates, inflation and economic growth.

Wheeler said a lower New Zealand dollar was needed to increase tradables inflation and to help deliver more balanced growth.

RBNZ Assistant Governor John McDermott told Reuters this most subtle of changes was aimed at communicating the bank's growing discomfort to the market, while recognising that some would have been disappointed they didn't use stronger language.

The New Zealand dollar, which is up almost 6% this year, jumped briefly to US$0.7371 after the policy statement was released, as some perceived the RBNZ as being more relaxed about the strength of the currency.

Many of those factors were global in nature, and Wheeler gave MPs a piece of advice in recognising that New Zealand's economy is hugely influenced by overseas events.

New Zealand's base rate has remained unchanged since November past year, when it was cut from 2.0 per cent, and analysts do not expect any movement until mid-2018 at the earliest. It forecast growth to stay above 3% in coming years.

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But the changes to its forecasts were limited.

The RBNZ doesn't project higher rates until the third quarter of 2019, according to its forecasts released in the accompanying monetary policy statement, in line with its previous predictions.

The New Zealand dollar was little changed, having fallen this week ahead of the Reserve Bank's monetary policy statement, which is expected to reiterate it sees no hurry to join other central banks in raising interest rates. With this statement, we expect a long pause from the RBNZ, unless the current global outlook changes materially, in terms of trade, commodity prices, and political uncertainties. RBNZ expects moderation to persist but the risk remains due to population growth and resource constraints.

Despite the RBNZ's dovish stance on rates, the kiwi dollar in trade weighted terms has been on the rise, a concern for the central bank since it is likely to put downward pressure on prices.

"So you've got all the ingredients for a resurgence".