RBNZ Downgraded Inflation Forecasts, First Rate Hike Unlikely Until 2019

As widely anticipated, RBNZ left the OCR unchanged at 1.75%. Owing to the downside surprise in 4Q17 inflation, policymakers revised lower their inflation forecast, mainly driven by tradeable inflation. Meanwhile, the central bank now sees currency appreciation a less concern, as NDZUSD has retreated to a one-month low, and indicates that the positive impacts of fiscal stimulus (including KiwiBuild and the increase in minimum wages) have diminished. The overall monetary stance remains neutral with the first hike unlikely coming before the 2Q19.

Headline CPI in New Zealand slowed to +0.1% q/q in 4Q17, from +0.5% a quarter ago. This came in even weaker than consensus of +0.1%. From a year ago, inflation eased to +1.6% from third quarter’s +1.9%. The market had anticipated a steadied +1.9%. The downside surprise triggered RBNZ to revise lower its headline inflation projection to +1.5% in 2018 (financial year), from November’s estimate to +2%, and to +1.8% for 2019, from November’s +2%. Most of the downside would be driven by tradeables inflation which is expected ‘to remain subdued through the forecast period’. Meanwhile the central bank expects a reacceleration in non-tradeables inflation ‘in line with increasing capacity pressures’.

The central bank also adjusted its GDP growth forecasts. Growth is expected to reach +3.2% in 2018, down -0.6 percentage point from the previous estimate, followed by an upward revision on 2019 growth to +3.5%, from November’s +3%. Note that growth over both periods should remain above the RBNZ’s estimate of trend growth of +3%. As noted in the accompanying statement, the central bank suggested that ‘the growth profile is weaker in the near term but stronger in the medium term’, when compared to the November statement.

On the exchange rate, RBNZ acknowledged that it has ‘firmed’ since the last meeting. However, it suggested that the strength was mainly driven by ‘a weak US dollar’ and noted that the trade-weighted exchange rate would ‘ease over the projection period’.

On the monetary policy outlook, RBNZ maintained the November reference that ‘monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly’. The OCR projections stay the same as the previous meeting with any move unlikely until mid- to end-2019 while more material rate hikes not seen until 2020.

RBNZ made quite a number of changes in the policy statement. However, the overall tone remains neutral as the positives and negatives largely offset each other. All in all, the central bank should leave the policy rate unchanged at 1.75% for the rest of this year. any rate hike would unlikely come until 2Q19, quite a distant future.