By David Hargreaves & Alex Tarrant
The Reserve Bank has left the Official Cash Rate unchanged at 1.75%, but is now forecasting a small rise in interest rates in future.
However, the immediate outlook portrayed by the central bank was probably more 'dovish' than the market expected, and therefore the Kiwi dollar reacted by dropping over half a cent against the American currency, to under US72.5c.
The immediate OCR outcome was expected, with most market attention on whether the RBNZ changed its outlook for the OCR in future years.
It has - slightly, from the last Monetary Policy Statement (MPS) in November, when it was forecasting unchanged rates right through till the end of 2019.
It now, however, has the OCR moving up by the equivalent of about a quarter of a percentage point in 2019.
RBNZ Governor Graeme Wheeler said the Reserve Bank now has a very much "neutral" bias on the OCR against a slight easing bias in November. Now the risks on increasing against decreasing the OCR are evenly balanced
The RBNZ now forecasts an average of 1.8% through June 2019 (previously 1.7%), before rising to 1.9% in the second half of 2019 and hitting 2.0% in March 2020. The bank had previously forecast a 1.7% average through 2019.
However, it has also delayed slightly when it expects annual CPI inflation to hit 2% - now in June 2019 against December 2018 in its November MPS.
The market has been expecting interest rates may begin to rise as soon as later this year, though most economists don't believe that to be the case. Wheeler said he thought the market had "got a bit ahead of itself".
On the housing market, Wheeler said the recent moderation in house price inflation was welcome, and in part reflected the new loan-to-value ratio restrictions put in place by the RBNZ from October and also recent higher mortgage rates.
He said, however, It was "uncertain" whether this moderation will be sustained given the continued imbalance between supply and demand.
Wheeler noted that headline inflation had returned to the RBNZ's 1% to 3% target band as past declines in oil prices dropped out of the annual calculation.
"Inflation is expected to return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradables inflation. Longer-term inflation expectations remain well-anchored at around 2%."
In the key 'last paragraph' of his statement, and in what was virtually a repeat of the November statement, Wheeler said monetary policy would "remain accommodative for a considerable period". He noted, however, that numerous uncertainties remain, particularly in respect of the international outlook, "and policy may need to adjust accordingly".
This statement was immediately seen by the marketplace as surprisingly 'dovish' given the recent upward shift both in real and expected inflation, hence the fall in value of the Kiwi dollar.
ANZ chief economist Cameron Bagrie and senior economist Philip Borkin said the RBNZ statement was "as cautious as it could possibly be, given the growth backdrop".
"A previous soft easing bias was removed, but the message is that the OCR is not going anywhere in a hurry. That is entirely appropriate in our view."
Here is the statement from the RBNZ:
Statement by Reserve Bank Governor Graeme Wheeler:
The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.
The recovery in commodity prices and more positive business and consumer sentiment in advanced economies have improved the global outlook. However, major challenges remain with on-going surplus capacity in the global economy and rising geo-political uncertainty.
Global headline inflation has increased, partly due to rising commodity prices. Global long-term interest rates have increased. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.
New Zealand’s financial conditions have firmed with long-term interest rates rising and continued upward pressure on the New Zealand dollar exchange rate. The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed.
Economic growth in New Zealand has increased as expected and is steadily drawing on spare resources. The outlook remains positive, supported by ongoing accommodative monetary policy, strong population growth, increased household spending and rising construction activity. Dairy prices have recovered in recent months but uncertainty remains around future outcomes.
Recent moderation in house price inflation is welcome, and in part reflects loan-to-value ratio restrictions and higher mortgage rates. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.
Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. Inflation is expected to return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradables inflation. Longer-term inflation expectations remain well-anchored at around 2 percent.
Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.