Steady RBNZ keeps door open to easing

WELLINGTON: New Zealand’s central bank kept its benchmark interest rate at a generous 2% yesterday, remaining an outlier in a world of ultra-low or negative interest rates, but the high New Zealand dollar and tepid inflation may soon spur it to cut.

Economists polled by Reuters had widely expected the Reserve Bank of New Zealand’s decision, with only one of the 18 surveyed expecting a rate cut.

The RBNZ left the door wide open for a cut later this year, knocking the New Zealand dollar off a two-week high to 0.7316 versus 0.7374 ahead of the decision. It has since pared some of those losses and is trading at 0.7364.

The decision came hot on the heels of the Bank of Japan overhauling its policy focus and the US Federal Reserve standing pat at ultra-low interest rates.

ASB senior economist Jane Turner noted the RBNZ preferred to amend rates in tandem with the publication of its monetary policy statement, which it does four times a year, with the next statement due in November.

“It gives them the ability to provide more context,” she said, adding that the RBNZ would only have opted to cut yesterday if there was a marked change from the August review.

Economists also said the central bank had been unlikely to cut yesterday after the economy grew at its fastest clip in two years and dairy prices have pushed higher over August.

Markets are now pricing in a 70% chance the Reserve Bank of New Zealand will cut rates in November after governor Graeme Wheeler reiterated yesterday that further easing would be needed versus a 56% chance before the decision.

“Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range,” he said.