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New Zealand central bank tipped to hold rates but seen cutting in

New Zealand's central bank is widely expected to keep interest rates on hold at a record low on Thursday but clearly signal more cuts to come as it looks to jump start inflation and bring down a high currency.

By: | Wellington | Published: September 19, 2016 9:32 AM
Sixteen of 17 economists polled by Reuters expect the Reserve Bank of New Zealand to keep rates at 2.00 percent at a review later this week, with only one expecting a 25 basis point rate cut. (Reuters) Sixteen of 17 economists polled by Reuters expect the Reserve Bank of New Zealand to keep rates at 2.00 percent at a review later this week, with only one expecting a 25 basis point rate cut. (Reuters)

New Zealand’s central bank is widely expected to keep interest rates on hold at a record low on Thursday but clearly signal more cuts to come as it looks to jump start inflation and bring down a high currency.

A recent raft of positive data underscore the case to keep rates unchanged for now. The economy grew at the fastest quarterly pace in two years in the June quarter and there has been a solid rise in global dairy prices – New Zealand’s main export.

Sixteen of 17 economists polled by Reuters expect the Reserve Bank of New Zealand to keep rates at 2.00 percent at a review later this week, with only one expecting a 25 basis point rate cut.

The market is pricing in only a 5 percent chance of a cut.

However, while easing doesn’t look to be on the cards this week, tepid inflation and the high New Zealand dollar mean economists are expecting at least one more before the end of the year.

After that, they see rates remaining steady at 1.75 percent, according to the median in the poll.

Inflation has been below the central bank’s 1 percent to 3 percent target range since June 2014 and is currently at 0.4 percent.

The central bank has clearly stated its current projections indicate “further policy easing will be required to ensure that future inflation settles near the middle of the target range.” It is expected to reiterate that sentiment on Thursday.

“Inflation risks are still skewed to the downside. The New Zealand dollar has continued to appreciate since the August monetary policy statement and remains above the Bank’s TWI assumed levels, despite these being significantly revised upwards,” said ASB Chief Economist Nick Tuffley.

Along with signaling more rate cuts, economists also agree the central bank will make every effort to jawbone the New Zealand dollar lower on Thursday.

“In an attempt to prevent the anticipated unchanged interest rate decision from resulting in an undesirable appreciation in the NZ dollar, we expect the RBNZ to reaffirm their explicit easing bias, said First NZ Capital Research Analyst Chris Green.

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