NZ OCR kept level as inflation stays low

The Reserve Bank of New Zealand’s latest attempt to talk down the kiwi dollar has had the reverse effect.


Governor Graeme Wheeler kept the official cash rate at 3.5 per cent on Thursday, as expected, saying inflation is expected to stay low in 2015 before gradually returning to the two per cent midpoint of the central bank’s one per cent-to-three per cent target band.

“The fall in oil prices is a net positive for global economic growth, but will further reduce inflation in the near term, at a time when global inflation is already very low,” Mr Wheeler said in the quarterly monetary policy statement.

“Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.”

The New Zealand dollar jumped as high as US73.05 cents after the statement from US71.84c immediately before, with traders saying his repeated reference to the possibility of rates moving up had sparked the kiwi’s spike.

The OCR has been unchanged since July so the bank can assess the impact of four earlier increases.

Since then, various central banks around the world have been cutting their benchmark rates as plunging global oil prices took the wind out of any inflationary pressures.

The Reserve Bank slashed its expectations for annual inflation, which it sees staying below one per cent until March next year, before rising to 1.7 per cent by early 2017. That was due largely to the slump in oil prices in 2014.

Mr Wheeler said the bank was closely monitoring the impact of weak inflation expectations on wage and price setting behaviour, particularly in the non-tradeable sector.

Mr Wheeler said the fall in oil prices had increased households’ purchasing power and lowered the cost of doing business, while employment and building activity remain strong, inbound migration is high and the housing market is picking up.

The currency is still a concern for the Reserve Bank, which Mr Wheeler again said was “unjustifiably high and unsustainable”.