NZ central bank stands pat, signals modest rises later; NZ dollar jumps

WELLINGTON: New Zealand's central bank held its benchmark rate steady on Thursday, and struck a relatively hawkish policy tone by signalling modest rate rises over time that propelled the local dollar higher.

The Reserve Bank of New Zealand said that while inflation was low, the economy was growing strongly and expected to do so for the next two years.

"Some further increase in the OCR (official cash rate) is expected to be required at a later stage," RBNZ Governor Graeme Wheeler said in a statement accompanying the decision to keep the cash rate at 3.50 percent for a third consecutive review.

"Further policy adjustments will depend on data emerging over the assessment period."

The New Zealand dollar rallied, partly as markets had expected a more dovish policy stance and more so as the RBNZ reinstated the reference to the need for further rate rises, which it had dropped in its October statement.

"The statement is not as dovish as some were expecting. There had been thoughts the RBNZ would shift to a clear neutral stance, but instead it kept the tightening bias intact," said Su-Lin Ong, senior economist at RBC Capital Markets.

The RBNZ said inflation was at low levels because of the high NZ dollar, modest house price inflation, and subdued wages, but was expected to pick up gradually.

The New Zealand dollar jumped to $0.7872, from $0.7685 before the statement to the chagrin of the RBNZ, which repeated that the currency was unjustifiably high and expected further "significant depreciation." The kiwi, which hit a 2-1/2 year trough of $0.7609 on Tuesday, last stood at $0.7834.

A Reuters poll taken after the latest statement had a majority view that the RBNZ will pause at least until the third quarter next year, in line with the central bank's bill forecasts. The poll sees the OCR at 3.75 percent by year end.

The central bank said the economy had been growing above trend, boosted by strong construction activity, high immigration, and low rates.

"The economy can sustain growth around 3 percent a year," Wheeler told a parliamentary committee, but said that a prolonged fall in dairy prices could significantly impact growth. The prices of dairy exports, the nation's biggest earner, are down about 50 percent this year.

It said there seemed to be some softening in major economies apart from the United States, and it expected monetary policy in all major economies to be supportive for longer.