Reserve Bank sees risks around future rate moves evenly balanced

by NZ Adviser03 Mar 2017
(Bloomberg) -- New Zealand’s central bank reiterated that borrowing costs may remain at a record low for a prolonged period, saying risks around future moves in the official cash rate are “equally weighted.”

“There is an equal probability that the next OCR adjustment could be up or down,” Reserve Bank Governor Graeme Wheeler said in a speech in Auckland Thursday. “If the economy were to develop in line with the bank’s economic projections, which are based on several assumptions, then the OCR would remain at its current level over the next two years.”

Wheeler last month kept the benchmark rate unchanged at 1.75 percent and signaled no change until late 2019. Traders are betting the central bank will respond to an expanding economy and mounting inflation pressures by starting to raise rates early next year.

“The implications for the OCR outlook remain the same: the RBNZ expects to be on hold for the next two-plus years,” Nick Tuffley, chief economist at ASB Bank in Auckland, said in an emailed note. “We continue to expect a gradual tightening cycle to start from late 2018.”

The New Zealand dollar pared its gains after initially rising about a quarter of a U.S. cent on Wheeler’s comments. It bought 71.46 cents at 10:05 a.m. in Wellington from 71.40 cents immediately before the statement.

‘Strong Growth’
The RBNZ in its Feb. 9 monetary policy statement forecast inflation won’t reach the 2 percent midpoint of its 1-3 percent target band until 2019, even as economic growth averages 3 percent over the next two years.

“We remain comfortable with our economic projections,” Wheeler said today. “In the absence of major shocks, prospects look reasonable for continued strong growth over the next two years driven by accommodative monetary policy, construction spending and net inward migration.”

There is some potential upside for economic growth if migration and commodity prices turn out to be stronger than forecast, but the risks around inflation look balanced, he added.

“The greatest source of uncertainty currently lies around the housing market and the possibility that imbalances in the housing market might deteriorate,” Wheeler said. “Fortunately, house price inflation has moderated substantially in recent months, but it’s too early to say whether this moderation will continue.”

Wheeler said the balance of risks for the global outlook is to the downside, with uncertainty around U.S. policy and its impact on global trade a key focus.

“The greatest source of global uncertainty relates to the U.S. administration policies in respect to its ‘America first’ policy platform,” he said. “Increased protectionist measures would represent a negative global supply shock” and “New Zealand would not fare well in such circumstances.”

Offsetting that, the possibility of a significant U.S. fiscal stimulus represents an upside risk for New Zealand through higher commodity prices and more demand for exports, Wheeler said.

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