June 19, 2017 / 7:29 AM / a year ago

PREVIEW-New Zealand's central bank to retain record low rates amid BNZ controversy

* RBNZ seen keeping rates at record lows of 1.75 percent

* C.bank expected to remain firmly neutral

* Emphasis on neutral position could rattle markets-Westpac

* Decision due 2100 GMT Wed. 9am Thur local time

By Ana Nicolaci da Costa

WELLINGTON, June 19 (Reuters) - The Reserve Bank of New Zealand is widely expected to keep interest rates at record lows and to retain a neutral bias this week - a position that has already sparked a controversy between the RBNZ and a large financial institution.

None of the 26 economists polled by Reuters expect the RBNZ to move on June 22.

First quarter growth underwhelmed market expectations, vindicating a decision not to raise rates but manufacturing and services data already point to a rebound in the second quarter. .

The Reserve Bank wrote in protest to the Bank of New Zealand last month, complaining that the language used in BNZ’s May rates preview questioned the central bank’s integrity.

BNZ said on May 8 it would be “negligent” of the central bank not to admit a tightening bias in its rate projections at its May meeting. It said the central bank would not raise rates then regardless of conditions for fear of getting “egg splattered all over its face”.

BNZ expects rates to rise as soon as the first quarter of 2018 and sees them at 2.50 percent by the third quarter of that year, although its preview lacks colourful language this time around:

“We are still struggling to reconcile the fact we have policy interest rates down at levels that are normally seen in, or reserved for, times of recession,” it said in a note.

Westpac economists said the Reserve Bank of New Zealand was unlikely to stray from a “firmly neutral tone” and could even reinforce it. The RBNZ held rates at 1.75 percent in May, reiterating monetary policy “will remain accommodative for a considerable period of time”.

“There is a risk that next week’s statement could emphasise the equal likelihood of rate cuts or hikes. That could rattle financial markets, which are largely focusing on rate hike scenarios,” Westpac said in a research note previewing Thursday’s decision.


Central bank Governor Graeme Wheeler, who has sole responsibility for setting rates, said in a letter to BNZ’s chief executive on May 11 that negligence was a “serious accusation”.

“To bring into question the Bank’s integrity while fundamentally misrepresenting how the Reserve Bank formulates policy is unacceptable,” he wrote in the letter made available in June after a local media requested it under the Official Information Act.

To write such a letter was an unusual move for the head of an independent central bank in an advanced economy, particularly one that directly regulates banks.

The fact the letter did not cause more controversy indicated the central bank’s power, analysts said.

“If you are a bank, you probably would be hesitant to attack the RBNZ in public because they are also regulating you,” said Oliver Hartwich, executive director of The New Zealand Initiative think tank, adding that the letter raised questions about the conduct of rates policy and bank regulation in New Zealand.

“Is it really desirable to have all the monetary policy power vested in one person? ...And the next question is whether it is right to have the banking supervision functions and monetary policy in one body.” (Reporting by Ana Nicolaci da Costa; Editing by Eric Meijer)

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