Thursday, March 12, 2015

RBNZ March Monetary Policy Statement: Neutral means NEUTRAL

Key points:
  • As expected there was no change in the Official Cash Rate today with the RBNZ leaving it unchanged at 3.5%.  In addition the Bank’s interest rate track now shows a completely flat track, reinforcing its neutral stance.  
  • That said, the interest rate projections are the best part of a year shorter than normal, lopping off the period in which we thought the Bank would show a further modest increase in interest rates.
  • The Bank’s forecasts look perfectly reasonable with their GDP forecasts still modestly higher than ours and with an output gap that is more positive than previously forecast.  Technically that means more inflationary, though their inflation forecasts show inflation remaining below 2% for longer thanks to lower petrol prices.
  • So neutral clearly means NEUTRAL with interest rates on hold for the foreseeable future.  The key paragraph from the policy assessment is as follows: “Our central projection is consistent with a period of stability in the OCR.  Future interest rate adjustment, either up or down, will depend on the emerging flow of economic data.”
  • It could well be that we don’t need interest rates any higher than they are today.  That will require the economy to be able to continue to grow at an above trend rate without generating inflation.   The key data going forward will be the labour market, particularly wages as the unemployment rate continues to track lower.  
  • For more on the outlook for the New Zealand economy and interest rates watch out for the upcoming March edition of New Zealand Insights - coming to your inbox soon.