RBNZ seen on hold until H2 2018 - UOB Group


At the May MPS, only one quarter-point rate hike was projected by 2020 and there has been speculation Thursday's forecasts will be just as flat. Inflation has slowed more than economists forecast and economic growth has disappointed on the downside.

This dovish message was still enough to dent the New Zealand Dollar overnight, particularly as the general sense of market risk aversion picked up further.

The kiwi traded at 73.09 United States cents as at 5pm in Wellington from 73.26 U.S. cents as at 8am in Wellington from 73.16 cents late yesterday.

The currency has risen more than 7 per cent against the greenback over the past three months, before falling immediately on the Reserve Bank's talk of intervention.

"While the basic tone of the Monetary Policy Statement was as expected, we were a little surprised that the RBNZ's reaction to recent weaker data was so muted", said Dominick Stephens, chief economist for New Zealand at Westpac Banking Corp.in Auckland.

The RBNZ has "a more medium-term focus" than the market and believes that "keeping things steady is important", he said.

"Nevertheless, we still expect the RBNZ will end up lifting the OCR slightly earlier than its forecasts imply" as it is underestimating the stimulatory impact of the recovering dairy sector and the price pressures generated by record immigration, they said in a research note.

The RBNZ, which targets inflation of 2 per cent over the medium term, now projects it won't raise rates for two years, even as the economy expands more than 3 per cent a year. But that was due to temporary influences such as food and fuel prices.

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The RBNZ lowered its expectations for inflation through 2018 and 2019.

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

The central bank expected growth to speed up, supported by low interest rates, strong population growth and fiscal stimulus in the 2017 budget.

"You've seen good output and employment growth over the last five years, but you've seen weak productivity growth", Wheeler said.

According to RBNZ policy makers, global economic growth increased and became more broad-based but wage growth subdued due to surplus capacity.

That's at least partly due to lending restrictions introduced by Wheeler, whose five-year term as governor ends September 26.

House price inflation continued to moderate due to loan-to-value ratio restrictions, affordability constraints, and a tightening in credit conditions.

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.