RBNZ Takes A Neutral Stance As OCR Is Unchanged At 1.75%

The Reserve Bank of New Zealand’s monetary policy meeting yesterday saw the central bank keeping the overnight cash rate (OCR) unchanged at 1.75% as widely expected.

The central bank noted that economic developments since the February monetary policy statement has been neutral and maintained a somewhat dovish language saying “monetary policy will remain accommodative for a considerable period.”

The statement was surprising, considering that given the recent uptick in inflation and employment data, the RBNZ could be looking at speeding up the pace of rate hikes and thus come out hawkish in its statement.

The RBNZ’s meeting in May was a disappointment for market hawks who expected the central bank to come out in support of rate hikes. However, the central bank was not convinced and opted to wait for more evidence that inflation will stay put within the 1 – 3% target band.

RBNZ dismisses inflation surge

The central bank was also not very convinced on the 2.2% jump in inflation, noting that most of the gains came due to temporary factors. Even the inflation forecasts for two years ahead showed an increase as inflation expectations increased 2.17%, which stoked expectations of a hawkish touch from the central bank.

However, the RBNZ said that its forecasts of inflation, a year from now is lower than it was in February. Inflation is expected to remain around 1.1% until the first quarter of 2018.

The RBNZ Gov. Wheeler dismissed the jump in inflation and attributed the jump in inflation to temporary price pressures in food and fuel. He said “We’re not going to see a burst of inflation in this economy. The story behind these forecasts is that we’re not seeing the build-up in inflation pressures that some other commentators are seeing.”

The RBNZ’s inflation forecasts for tradables were revised higher to reflect the lower exchange rate for the New Zealand dollar.

In a separate report released by Statistics New Zealand, the Food Price Index (FPI) data showed that food prices were down 0.2% on a seasonally adjusted basis in the month of April. The declines in April followed a 0.3% decline from the previous month. While fruit and vegetable prices rose 4.2% on the month meat, poultry and fish prices posted a drag, falling 1.7%.