New Zealand holds interest rate steady at record low

Jerry Collins against South Africa in the 2007 Tri Nations

Surprisingly, the central bank concluded that developments since the meeting in February have been neutral for monetary policy.

The bank projected Thursday that inflation will slow to 1.1 percent in the first quarter of 2018, and said a premature monetary tightening could undermine growth.

McDermott said the main three worldwide risks were the outlook for USA fiscal policy, European growth and China demand. "Longer-term inflation expectations remain well-anchored at around 2 per cent".

The kiwi dropped half a U.S. cent after the release and was recently trading at US68.47 cents from US69.30c immediately before.

According ANZ's Bagrie and Brooks, "the RBNZ appears to be more comfortable regarding the NZD, which it notes has fallen, and if sustained, will help re-balance the growth outlook".

The RBNZ is forecasting inflation will hold at a 2.1 per cent annual rate in the June and September quarters and then decline to 1.7 per cent in the December quarter. With inflation above target and the economy growing at a healthy clip, many see an interest rate hike in New Zealand's medium-term outlook.

"While the OCR will no doubt be left unchanged at 1.75 percent, attention will be on the tone, which we expect to remain balanced, cautious and watchful", Bagrie said. Policymakers shrugged off the recent NZD depreciation and the rise in inflation, indicating that the monetary policy would likely stay unchanged for the rest of the year and probably until 2020 before tightening.

The trade-weighted exchange rate has fallen by around 5 percent since February, partly in response to global developments and reduced interest rate differentials. It was the first time since 2011 the bank had reached the midpoint of its target range.

New Zealand holds interest rate steady at record low
New Zealand holds interest rate steady at record low

"Underlying inflationary pressure is no different today than it was in February", Assistant Governor John McDermott told Reuters in an interview, adding that a spike in headline inflation in the March quarter was mainly due to temporary rises in petrol and food prices.

House price inflation has moderated further, especially in Auckland.

He believed there was a possibility the OCR might go up by the year's end, but it depends on what happens with the Budget on May 25.

"The growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth and high levels of household spending and construction activity", Wheeler said.

GDP growth in the second half of 2016 was weaker than expected.

"We and the market had expected it to signal an earlier start to interest rate hikes", he said.

"This moderation is expected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand", Wheeler said.

Compared to other commodities the prices of Dairy Goods, New Zealand's largest export, are "stabilising".

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