In a widely anticipated move the Reserve Bank of New Zealand continued the process of removing the significant monetary accommodation from the economy with a second 25bp hike in the Official Cash rate (OCR) to 3.0%.
With the hike widely anticipated the
interest for today was the accompanying press release (this being an OCR
review, the RBNZ releases just a one-page comment rather than a full Monetary Policy
Statement). Markets were looking for any
indication of the extent to which recent developments, including the strength
of the exchange rate and the lower-than-expected March quarter CPI out-turn,
had swayed the RBNZ from the path articulated in the March Monetary Policy Statement.
The press release made no specific reference
to the March CPI, choosing to remain future-focussed which is entirely the
right place to keep the focus. And the exchange
rate got the usual digs about being a headwind to the tradeables sector and unsustainable
at the current level.
The RBNZ clearly wants to get on the job of
raising interest rates “towards a level at which they are no longer adding to
demand”. That’s reflected in their
acknowledgment that New Zealand’s economic expansion has “considerable momentum”
and “spare capacity is being absorbed, and inflationary pressures are becoming
The exchange rate is a clear frustration. While it seems obvious for the RBNZ to state that
the “speed and extent to which the OCR will be raised will depend on economic
data and our continuing assessment of emerging inflationary pressures…” they
have added an extra clause to that sentence “…including the extent to which the high exchange
rate leads to lower inflationary pressure.”
So while the RBNZ appears undeterred from
the process of removing monetary accommodation, the exchange rate could still
come into play if inflation continues to print on the downside of expectations and
the exchange rate is deemed to be the culprit.