May 10, 2017 / 9:50 PM / in 2 months

UPDATE 1-New Zealand central bank holds rates at 1.75 pct, retains neutral bias

3 Min Read

(Adds details, comment from RBNZ, economist)

By Charlotte Greenfield and Jane Wardell

WELLINGTON, May 11 (Reuters) - New Zealand's central bank held its benchmark interest rate steady at 1.75 percent on Thursday and retained its neutral bias, defying the expectations of many economists that it would lean toward a tightening of monetary policy in early 2019.

The New Zealand dollar fell sharply immediately following the release of the Reserve Bank of New Zealand (RBNZ) statement, dropping 1.4 percent to an 11-month low of $0.6843.

RBNZ Governor Graeme Wheeler said that a recent depreciation in the New Zealand dollar was "encouraging, and if sustained, would help rebalance the growth outlook."

He reiterated his statement from the last two rate decisions in March and February that monetary policy "will remain accommodative for a considerable period of time."

All 26 economists polled by Reuters had expected no change to the official cash rate (OCR), which was lowered by 25 basis points to the current record low in November, and forecast that rates would remain stable throughout 2017.

Many had suggested, however, that Wheeler was coming under pressure to discard his neutral stance on monetary policy with inflation picking up faster than the central bank expected in the first quarter.

"The OCR outlook was unchanged from its February MPS, still implying a late 2019 tightening," Nick Tuffley, chief economist at ASB in Auckland. "We had expected they would have brought that forward to the first half of 2019, so that's a very firm message from the RBNZ that the stance hasn't changed."

Wheeler said the increase in headline inflation in the March quarter was mainly due to temporary effects, particularly volatile petrol and food prices, and headline inflation would reach the midpoint of the 1 percent-3 percent target band over the medium term.

"Longer-term inflation expectations remain well-anchored at around 2 percent," he added.

Inflation accelerated to 2.2 percent in the first quarter, well above the RBNZ's projection of 1.5 percent. It was the first time since 2011 the bank had reached the midpoint of its target range.

Additional reporting by Swati Pandey in SYDNEY, editing by G Crosse

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