New Zealand holds interest rate at record low

Yolanda Curtis
August 10, 2017

New Zealand's central bank held interest rates at a record low and said it doesn't expect to raise them for two years amid weak inflation.

The currency nevertheless rose after the statement to trade at 73.51 US cents at 12:27 Wellington.

It fell a similar amount earlier on Thursday when RBNZ Governor Graeme Wheeler told a parliamentary committee that currency market intervention "is always open to us".

However, both ended up climbing their way out of choppiness as the markets digested the central bank's policy statement.

Mr Wheeler said on Thursday that monetary policy would remain accommodative for a while yet, sticking to the language of recent statements after keeping interest rates at a record-low 1.75 per cent - as expected. The bank maintained its forecast that rates won't rise until the third quarter of 2019, and lowered its projections for inflation.

We remain of the view that monetary policy is unlikely to change until at least the second half of 2018.

Labour productivity shrank 0.1 percent in the 2017 March year after contracting 0.2 percent in 2016, although the central bank predicts it will hit 0.9 percent by 2020, the end of its forecast horizon, which would be the highest level since 2011.

The central bank said capacity pressures would gradually push non-tradables inflation higher and reiterated the risk of house prices rising again.

Wheeler said growth is "expected to improve going forward", supported by low borrowing costs, strong population growth, an elevated terms of trade and fiscal stimulus.

"You've seen good output and employment growth over the last five years, but you've seen weak productivity growth", Wheeler said. Policymakers noted that the "outlook for tradable inflation remains weak", while 'non-tradables inflation remains moderate but is expected to increase gradually as capacity pressure increases, bringing headline inflation to the midpoint of the target range over the medium term.

"Longer-term inflation expectations remain well anchored at around 2.0 per cent", he said, which would place it in the middle of the targeted 1.0-3.0 per cent inflation band. "Numerous uncertainties remain and policy may need to adjust accordingly".

The RBNZ has been balancing a nascent recovery in inflation against the demands of a frothy housing market, which is now showing some signs of cooling thanks to loan-to-value restrictions and banks lifting mortgage rates independent of the official cash rate.

All 21 economists in a Reuters poll expected the central bank to stay put on Thursday, but some had expected it to strike a more dovish tone by acknowledging the recent run of softer data or adjusting its inflation and interest rate forecasts.

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