RBNZ Paused In Rate Hike, Probably Until Next Year

The RBNZ delayed the rate hike schedule in September amidst lower inflation forecasts. The central bank left the OCR unchanged at 3.5%, following rate hikes over the past 4 consecutive meetings. Governor Graeme Wheeler indicated that ‘it is prudent to undertake a period of monitoring and assessment before considering further policy adjustment’. The RBNZ appeared deliberatively vague in communicate the timing of the next rate hike, noting that it expects ‘some further policy tightening will be necessary to keep future average inflation near the 2% target mid-point and ensure that the economic expansion can be sustained’. Overall, the policy statement appears more dovish than expected on reduced inflationary pressure.

The September MPS showed a softening from the June one on the tightening schedule. In June, the RBNZ clearly signaled that the rate hike would come in December. However, in September, while the published 90-day bank bill rate track appeared to imply that rates could be raised as early as December, it’s more likely that the pause would be until March 2015. The RBNZ staff members noted that the central bank’s actual view is to increase rate sometime between December 2014 and September 2015.

Staying in the 90-day bank bill rate, the RBNZ lowered its rate hike forecasts to 3.8% for end-2014 (from 4%), 4.3% for end-2015 (from 4.3%) and 4.7% for end-2016(from 5.2%). The peak rate was also lowered to 4.8% from 5.3%, suggesting that the OCR is expected to peak at 4.50 – 4.75%, compared with previous forecast of 5.00 – 5.25%. Note that the central bank said previously that the neutral short rate has fallen to 4.6%, suggesting that the return to neutral policy would take place in around mid-2016, instead of 2H15.

The RBNZ reiterated its warning over strong NZD, calling current levels ‘unjustified and unsustainable’. It also warned that the currency is prone to ‘significant depreciation’, reinforced by the Fed’s beginning to ‘normalize’ monetary policy.

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