RBNZ keeps rates at 1.75pc but may be signaling lower growth forecasts

Reserve Bank Acting Governor Grant Spencer. Photo / Jason Oxenham

Acting Reserve Bank governor Grant Spencer kept the official cash rate unchanged at 1.75 per cent as widely expected and signaled no change on the immediate horizon but may have dropped a hint that the bank has lowered its growth forecasts as he begins his six-month stint at the helm.

"Monetary policy will remain accommodative for a considerable period," Spencer said in a statement. "Numerous uncertainties remain and policy may need to adjust accordingly."

Rates have been on hold since November last year and the central bank's forecasts show it does not expect to begin lifting rates until September 2019 at the earliest. All 13 economists polled by Bloomberg predicted rates would remain unchanged.

On economic growth, Spencer said the economy grew in line with expectations in the second quarter, following relative weakness in previous quarters. He noted that while exports recovered, construction was weaker than expected. However, while he said growth is projected to "maintain its current pace going forward", in August the bank said growth was expected to improve. Gross domestic product grew 0.8 per cent in the three months to June 30, from a revised 0.6 per cent expansion in the March quarter and was 2.5 per cent higher on the year.

Today's reference to growth was "clearly weaker than the RBNZ's previous statement," said Westpac Banking Corp chief economist Dominick Stephens. He noted that if the most recent GDP outturn was repeated, the annual percentage change would reach 3.2 per cent by June 2018 versus the RBNZ's forecast of 3.8 per cent in the August monetary policy statement.

The "acknowledgement of a lower growth outlook was an important development that could hint in the direction of a more dovish November monetary policy statement," said Stephens.

Kiwibank chief economist Zoe Wallis also said the tweak to the language "suggests the Bank's growth forecasts may be pointing toward a slightly lower growth profile in coming years. This isn't a surprise given the constraints we are currently seeing, particularly in the construction sector."

ASB chief economist Nick Tuffley also said the RBNZ may "have shaved its growth outlook slightly" but underscored "the key message is the RBNZ has maintained its neutral stance." ASB does not expect any rate increases until February 2019.

Cameron Bagrie, chief economist for ANZ Bank in New Zealand, also pointed to the "clear neutral tone," and said it was hardly surprising given election proximity, key RBNZ leadership changes, and somewhat mixed economic developments.

While he said the comments around growth seem "a little dovish," he noted "if you put it in the context of sequential growth lifting in Q2 from 0.5 per cent to 0.8 per cent quarter-on-quarter then there is probably nothing in it."

The New Zealand dollar edged lower to 72 US cents after the statement from 72.20 cents just prior. It was at 75.95 on a trade-weighted index basis.

Ross Weston, a senior trader at Kiwibank, said swap rates "barely moved" on the announcement with the 2-year swap down half a basis point. He said, however, rates are getting pushed around by US moves after US President Donald Trump unveiled plans to overhaul taxes, slashing the corporate rate to 20 per cent from 35 per cent and reducing the top tax rate to 35 per cent from 39.6 per cent, although he didn't set out how this would be achieved without driving up the US federal deficit.

Weston also said the New Zealand market is rangebound as it awaits news on which parties will form the next government. There was no clear winner in Saturday's election with both the National Party and Labour-Green bloc now vying to form a government with New Zealand First. No decision is expected until October 12.

The two-year swap rate was up 1 basis point from late yesterday to 2.20 per cent and 10-year swaps gained 3 basis points to 3.23 per cent. Market pricing for the next rate increase continues to point to November 2019.

Spencer did note that the New Zealand dollar has eased slightly on a trade-weighted index basis since the bank's most recent statement in August and "a lower New Zealand dollar would help to increase tradables inflation and deliver more balanced growth."

The TWI was at 77.38 just after the August statement.

Spencer said house price inflation continues to moderate due to loan-to-value ratio restrictions, affordability constraints and a tightening in credit conditions. While the moderation is expected to persist he said there is still a risk of a resurgence in prices given population growth and resource constraints in the construction sector.

Regarding annual inflation, he noted it eased in the June quarter but said it remains "within the target range."

Annual inflation was running at 1.7 per cent in the June quarter and the central bank is mandated with keeping it between 1-and-3 per cent, with a focus on the midpoint. He reiterated it may continue to decline in coming quarters reflecting volatility in tradables inflation.

Non-tradables inflation remains moderate but is expected to increase gradually as capacity pressure increases, bringing headline inflation to the midpoint of the target range over the medium term, said Spencer. "Longer-term inflation expectations remain well anchored at around 2 per cent," he said.

Spencer took over from Graeme Wheeler, whose five-year term ended this week. He will remain in the position until the new government appoints a permanent governor.