RBNZ: Expect OCR stuck for a long time - Westpac

The August Monetary Policy Statement was expected by markets and analysts to result in a modest dovish shift, but the RBNZ judged positive and negative developments were roughly balanced, and saw no need to make a splash, notes the analysis team at Westpac.

Key Quotes

“Underlying inflation, based on a range of measures, bottomed out in 2015 and has been lifting gradually since.”

“But temporary effects (food and fuel, and high exchange rate) and gradual economic growth will keep inflation on the softer side of the RBNZ target.”

“Exchange rate movements typically flow through into consumer prices with a lag of up to a year. Thus, we expect the strong currency to continue to weigh on inflation over the coming year.”

“The economy is not growing substantially faster than its potential pace, and the labour market has not to date been sufficiently tight to drive an acceleration in wage growth.”

“We expect inflation to remain below the 2% midpoint of the RBNZ’s target range until late 2019.”

“The RBNZ will be reluctant to consider any policy tightening at a time when inflation is still lingering on the lower side of the target.”

“Accordingly, we expect the OCR to remain on hold until late 2019.”