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UPDATE 3-NZ cenbank stands pat, to stay sidelined for some time on muted inflation
March 12, 2015 / 3:36 AM / 3 years ago

UPDATE 3-NZ cenbank stands pat, to stay sidelined for some time on muted inflation

* Official cash rate held at 3.50 pct, as expected

* RBNZ expects to stay on hold for “some time”

* NZ dlr jumps a full US cent

* RBNZ lowers wholesale rate fcsts, suggesting rates low for longer

* RBNZ repeats NZ$ unjustified, unsustainable, needs to fall (Adds new poll, updates comments, prices)

By Gyles Beckford

WELLINGTON, March 12 (Reuters) - New Zealand’s central bank held its benchmark rate steady on Thursday, adopting a markedly neutral tone to signal it could be on hold for some time but also leaving the door open for a possible cut.

The Reserve Bank of New Zealand (RBNZ) said inflation was expected to remain lower for longer because of the sharp fall in oil prices, but while the economy was growing strongly there was no need to change rates.

“Our central projection is consistent with a period of stability in the OCR,” RBNZ Governor Graeme Wheeler said in a statement, as the official cash rate (OCR) was kept at 3.50 percent for a fifth consecutive review.

The bank’s statement was similar to the January statement, repeating that: “Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.”

But the RBNZ’s forecast of wholesale 90 day bank bill rates , taken as a proxy for the OCR, was lowered from the December statement, and indicated at 3.7 percent through to early 2017.

Economists said the central bank looks comfortable holding rates for a good deal longer.

“If anything, the RBNZ was even more firm that it does not intend to move the OCR in either direction for the foreseeable future,” said Westpac chief economist Dominick Stephens.

The New Zealand dollar bounded higher to settle around $0.7300 from $0.7193 before the statement with the RBNZ seen not as dovish as markets had positioned for.

The kiwi rallied even as the RBNZ repeated its now-familiar warning that the currency was unjustifiably and unsustainably high, and needed a “substantial correction” to help the external balance.

Market pricing based on overnight interest rate swaps showed an 8 percent chance of a rate cut at the April review with 21 basis points of cuts indicated over the next 12 months.

A Reuters poll after the statement reaffirmed expectations of the next move being a rise no earlier than the first quarter of next year.


Wheeler said the strength of New Zealand’s economy, with growth projected above 3 percent over the next two years, was the key difference versus countries such as Australia and Canada, which have seen rates cuts this year.

Growth was being driven by strong construction activity, household incomes which have been lifted by the fall in fuel prices, low interest rates, and a housing market showing signs of picking up again.

On the downside, sharply lower dairy prices, drought in parts of the country, and a high exchange rate would weigh on growth.

However, inflation, which fell to 0.8 percent in the year to December, was expected to stay below 1 percent through 2015 and the outlook was more muted.

Wheeler said a 1-3 percent inflation band was still an appropriate policy framework and the target of reaching the midpoint was still “highly relevant”.

However, he said he was “less sure” that the neutral level for the bank’s cash rate was around 4.5 percent, against the current 3.5 percent.

He said inflation expectations and how they affected wage- and price- setting would be important. A significant reduction in expectations “would warrant more supportive monetary policy”.

“There is absolutely no reason to lower interest rates while the economy remains so robust and pressures remain on the housing market,” said BNZ head of research Stephen Toplis.

“There is absolutely no reason to raise rates when there is no inflation.”

Editing by Shri Navaratnam

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