Reserve Bank of New Zealand holds cash rate at 3.5%, neutral view

Investing.com - The Reserve Bank of New Zealand on Thursday held its official cash rate at 3.5%, citing a neutral view of inflation even as the economy shows signs of strength and monetary policy is seen as expansionary.

For the full text statement, see:

Statement issued by Reserve Bank Governor Graeme Wheeler:

The Reserve Bank today left the Official Cash Rate unchanged at 3.5 percent.

Global financial conditions remain very accommodative, and are reflected in high equity prices and record low interest rates. However, volatility in financial markets has increased since late-2014 following the sharp drop in oil prices, continued uncertainty about the global outlook and US monetary policy, and policy easings by a number of central banks.

Trading partner growth in 2015 is expected to continue at a similar pace to 2014. Growth remains robust in the US, but has slowed recently in China.

World oil prices are about 50 percent below their June-2014 peak, more reflecting increased supply than demand factors. The fall in oil prices is net positive for global economic growth, but will further reduce inflation in the near term, at a time when global inflation is already very low.

The domestic economy remains strong. The fall in petrol prices has increased households’ purchasing power and lowered the cost of doing business. Employment and construction activity are strong. Net immigration remains high, and monetary policy continues to be supportive. The housing market is showing signs of picking up, particularly in Auckland. However, there are a number of factors weighing on domestic growth, including drought conditions in parts of the country, fiscal consolidation, reduced dairy incomes, and the high exchange rate.

On a trade-weighted basis, the New Zealand dollar remains unjustifiably high and unsustainable in terms of New Zealand’s long-term economic fundamentals. A substantial downward correction in the real exchange rate is needed to put New Zealand’s external accounts on a more sustainable footing.

Annual CPI inflation is expected to fall to around zero in the March quarter and remain low over 2015, reflecting the high exchange rate, low global inflation, and the recent falls in petrol prices. Inflation expectations appear to have fallen recently, and we will be closely monitoring the impact of this trend on wage and price setting behaviour, especially in the non-traded sector.

Monetary policy remains focused on ensuring inflation settles at 2 percent over the medium term. As the economy expands, inflation returns gradually towards the midpoint of the target range.

Our central projection is consistent with a period of stability in the OCR. However, future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.