Central Bank Views

RBNZ's Rate Hike Path Still Lags Market Expectations

Typography

As expected, RBNZ left the OCR unchanged at 1.75%, following three rate cuts in 2016. The policy statement has changed to a more neutral tone from an accommodative one previously. Yet, the central bank's rate hike forecasts stay at a slower pace than what the market has priced in. Policymakers acknowledged that economic growth has 'increased as expected and is steadily drawing on spare resources'. The outlook remain s positive. It also acknowledged the return of headline CPI to the target band, and judged it would gradually move to the midpoint of the band. We expect the OCR would stay unchanged for the rest of the year.

As noted in the monetary statement, policymakers agreed that the pickup in domestic growth has come in line with expectation. The outlook remains positive as supported by 'ongoing accommodative monetary policy, strong population growth, increased household spending and rising construction activity'. Inflation has improved recently. Headline CPI has returned to 'the target band as past declines in oil prices dropped out of the annual calculation'. RBNZ expects inflation to 'return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradables inflation'.

On the housing market, RBNZ acknowledged that recent housing prices have slowed down, attributing it to the 'loan-to-value ratio restrictions and higher mortgage rates'. However, it stayed cautious and indicated that 'It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand'.

On the monetary policy outlook, RBNZ reiterated that it would 'remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly'. The central bank now forecasts one rate hike in 2019. While the forecast comes in more hawkish than previously, it remains more dovish than market expectations.

Earlier this week, Governor Wheeler announced that he will not be seeking another term at the RBNZ, once his current term comes to an end in September 2017. Deputy governor Grant Spencer would take over as acting governor for a period of 6 months upon the conclusion of Governor Wheeler's term, before a new full time governor is appointed in March 2018. Yet, we believe this would not do much change to the monetary stance of RBNZ