The Reserve Bank of New Zealand (RBNZ), which raised its rate by 100 basis points in 2014, added that it's central projection was consistent with a period of stability in the OCR, a slight change to January's statement when it said it it expected to keep the OCR on hold for some time.
But the RBNZ sharpened its language about the New Zealand dollar, known as the kiwi. While it repeated that it remains unjustifiably high and unsustainable in light of the country's economic fundamentals, it added that "a substantial downward correction in the real exchange rate is needed to put New Zealand's external accounts on a more sustainable footing."
This compares with January's statement when it said that it expected "further significant depreciation."
The kiwi appreciated from the global financial crises in March 2009 to July 2014 but since then it has been depreciating, with the fall accelerating since Jan. 19 this year when the RBNZ dropped its previous tightening bias.
The kiwi then resumed its rise during February but started falling this month. Today it rose sharply following the RBNZ's statement, quoted at 1.369 to the U.S. dollar compared with yesterday's 1.388, but was down 6.3 percent since the start of the year.
In addition to the stronger language about the kiwi, the RBNZ also seems to have become more concerned about the fall in inflation, saying inflation expectations appeared to have fallen and it would be "closely monitoring the impact of this trend in wage and price setting behaviour."
New Zealand's inflation rate fell further in the fourth quarter of 2014 to 0.8 percent from 1.0 percent in the third quarter, below the central bank's target of 2.0 percent, plus/minus 1 percentage point.
The RBNZ said it expects inflation to fall to around zero in the March quarter and remain low during the rest of this year due to the high exchange rate, low global inflation and the fall in petrol prices.
The Reserve Bank of New Zealand issued the following statement:
"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."
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