February 8, 2018 / 1:25 AM / 3 months ago

New Zealand's central bank happy to wait as inflation lags growth

WELLINGTON (Reuters) - New Zealand’s central bank plans to keep interest rates at a record low into next year, saying on Thursday that with inflation stuck in the low end of its target range policy needed to be accommodative even as the economy runs near capacity.

FILE PHOTO: Pedestrians walk near the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand, July 3, 2017. REUTERS/David Gray/File Photo

The Reserve Bank of New Zealand also signaled a relaxed stance on the recent strengthening of the local dollar, but indicated that tone would change if it became an entrenched trend that effectively tightened monetary conditions.

Governor Grant Spencer said that while the wild swings in global equity markets over the past week looked to have been contained for now, they were a warning that markets were very nervous about central banks tightening policy.

At its policy review earlier in the day, the RBNZ held its cash rate at 1.75 percent, where it has been since November 2016, and lowered its forecasts for inflation out to 2020, suggesting investors need not fear the withdrawal of stimulus for a long time to come.

“What stood out in today’s statement was a slightly dovish set of forecasts, in particular a CPI inflation track,” said Kiwibank senior economist Jeremy Couchman.

That dovish slant on the inflation outlook pushed the local dollar NZD= down more than half a U.S. cent to a one-month low of $0.7195.

The kiwi rose more than 8 percent against the struggling U.S. dollar over December and January, and while it has lost some ground this month analysts were still surprised that the RBNZ did not do more to talk it down, as it had done previously.

Spencer told reporters he was comfortable with the kiwi’s current level, even though he acknowledged the broader weakening of the U.S. dollar had not been anticipated.

The central bank is currently expecting the New Zealand dollar to rise a little on a trade weighted basis from 73.8 in December to 75.0, and hold steady at that level throughout 2018.

“Would we have preferred it to stay where it was in November? Of course,” Assistant Governor John McDermott told Reuters in an interview.

“If it kept going in that (upwards) direction and it was following a trend, I’d think you’d find the bank would start using different language.”

NUDGE NEEDED FOR INFLATION

The RBNZ reinforced its determination to hold rates into 2019 as it grappled with weaker-than-expected inflation.

“Core inflation...still needs a little shove to get it towards the midpoint. That strategy hasn’t changed,” McDermott said.

Consumer price inflation for the December quarter undershot all expectations at an annual rate of 1.6 percent. The RBNZ had hoped it would be nearer 2 percent, the middle of its 1-3 percent target band.

But with inflation expectations holding around 2 percent and non-tradeable inflation running at 2.5 percent at the end of 2017, McDermott said there was no need to alter interest rate projections.

MARKET VOLATILITY A WARNING

The central bank was also keeping a close eye on the global move towards lifting interest rates, which Spencer said was a risk to the RBNZ’s current plans to hold policy steady until the second half of 2019.

Spencer said wild stock market swings around the globe on worries about rising inflation and higher rates had not changed the RBNZ’s forecasts as it had largely been confined to equity markets for now.

“But you’d have to say it’s been a warning sign because that volatility shows how nervous the market is about...the normalization of interest rates,” Spencer said.

“If that volatility translates through into interest rate markets and has a more pervasive effect on our forecasts for example, then it would be an upside risk on our interest rate track.”

Reporting by Charlotte Greenfield and John MairEditing by Eric Meijer & Shri Navaratnam

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