RBNZ, Fed keep rate action for later this year

The Reserve Bank of New Zealand and the US Federal Reserve stuck to their scripts today, pushing out any action on interest rates until later this year.

The Federal Open Market Committee kept the target for the federal funds rate at 0.25-to-0.5 per cent, judging the case for an increase had strengthened, pending the flow of economic data. Meanwhile, RBNZ governor Graeme Wheeler held the official cash rate at 2 per cent and kept his bias for a cut later this year provided the economic data played out as expected.

The Fed's decision is key for Wheeler because low US interest rates have sapped demand for the greenback, making the kiwi dollar stronger, reducing New Zealand's imported costs and dragging down headline inflation. While that's been good for consumers, it's coincided with rapid house price increases fuelled by cheap borrowing costs, making life difficult for Wheeler because he doesn't want to cut interest rates too sharply for fear of fanning an over-heated property market.

"Have we actually learned anything from the Fed and the RBNZ this morning? Not really," said ANZ Bank New Zealand economist Phil Borkin. "We're still watching the data in both cases, the RBNZ's still going to cut, the Fed do want to hike but they're not in any hurry - which is all stuff that we already knew."

Borkin said the RBNZ's Wheeler delivered a message consistent with earlier statements that New Zealand's interest rate differential is too high to leave things as is, but a more aggressive stance ran the risk of destabilising the financial system.

ANZ expects a rate cut at the November monetary policy statement, and Wheeler today said the bank's "current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range".

The RBNZ and Fed meetings followed the Bank of Japan's policy review yesterday which scrapped a base money target and shifted the focus of its asset-purchase programme to long-term rates, which has been described like the reverse of the Fed's 'Operation Twist' in 2011, when the US central bank used the proceeds from sales of short-term Treasury bills to buy long-term Treasury notes to drive down long-term interest rates.

ANZ's Borkin said the markets will probably reserve judgement until they see how the framework plays out, though the European Central Bank may pay close attention as it contends with its own negative rates impacting the region's financial system.

The RBNZ's Wheeler today said global growth was "below trend despite being supported by unprecedented levels of monetary stimulus" and "surplus capacity remains across many economies and, along with low commodity prices, is suppressing global inflation".

Those weak conditions and relatively low interest rates elsewhere, and recent gains in export prices, were underpinning the kiwi dollar's strength which was leaning against domestic inflation, Wheeler said.

"Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, reduced drag from tradables inflation, and rising non-tradables inflation," he said. "Although long-term inflation expectations are well-anchored at 2 per cent, the sustained weakness in headline inflation risks further declines in inflation expectations."

Wheeler today said headline inflation was still being pushed down by the tradable component, which is linked to the currency's strength and would weaken in the September quarter due to a cut in Accident Compensation Corp levies and cheaper petrol. Government data show consumer prices rose an annual 0.4 per cent in the June quarter, the seventh quarter below the Reserve Bank's 1-to-3 per cent target band.

The kiwi slipped to 73.43 US cents from 73.51 cents before the release, and the trade-weighted index decreased to 77.94 from 78.09.