Tuesday, 22 January, 2019

New Zealand's central bank holds rates, says volatility a warning

New Zealand's central bank holds rates, says volatility a warning New Zealand's central bank holds rates, says volatility a warning
Russell Knight | 08 February, 2018, 16:56

Governor Grant Spencer said that while the wild swings in global equity markets over the past week looked to have been contained for now, they were a warning that markets were very nervous about central banks tightening policy.

Meanwhile, Bank of New Zealand introduced a new one-year fixed term interest rate of 4.39 percent, effective from Friday, and lower than its rate of 4.59 percent.

New Zealand GDP growth eased over the second half of 2017 but was expected to strengthen, driven by accommodative monetary policy, a high terms of trade, government spending and population growth.

"Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory, " the Reserve Bank said.

"That's central bank nirvana", McDermott said in an interview in Wellington Thursday after the Reserve Bank held its benchmark rate at 1.75 percent, a record low.

"It is a justifiably dovish statement", said Ben Jarman, a senior economist at JPMorgan in Sydney.

Spencer told reporters he was comfortable with the kiwi's current level, even though he acknowledged the broader weakening of the US dollar had not been anticipated.

Analysts had expected the central bank to keep the rate the same because of low inflation.

New Zealand's central bank holds rates, says volatility a warning

"Would we have preferred it to stay where it was in November?" It is expected to be held steady for some time.

"Core inflation...still needs a little shove to get it towards the midpoint".

McDermott said the bank's stance on rates is "neutral".

The RBNZ today forecast that inflation will slow to 1.1 percent this quarter from 1.6 percent last quarter.

Core inflation is now running at 1.4 percent and McDermott said "indicators are it will gradually move up". It doesn't expect inflation to return to the mid-point of its 1 percent-to-3 percent target band until September 2020 versus a prior forecast of June 2018.

BNZ head of research Stephen Toplis in a report said the bank saw no need to change its view that the RBNZ would start raising interest rates in February 2019 "and then it moves relatively aggressively".

"But you'd have to say it's been a warning sign because that volatility shows how nervous the market is about...the normalisation of interest rates", Spencer said. "If it was sharper you'd have more volatility down the track".

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