Holds Steady, To Stay In Restrictive Territory

As widely expected, the RBNZ left interest rates unchanged at 5.50%, This was the sell-side consensus and our own firm bias.

• The accompanying statement indicated rates will need to stay in restrictive territory for the foreseeable future in order to ensure that inflation returns to the 1-3% target, while supporting sustainable employment. The current level of policy rates is constraining inflation and spending as anticipated.
• The global growth backdrop is weaker, which is weighing on NZ related commodity prices, while global inflation pressures have moderated.
• Local inflation pressures are easing and are expected to continue to do so. The labor market is still tight and operating beyond maximum capacity but there are signs of reduced pressure, which is expected to be aided by an on-going recovery in net migration.
• Consumer and business spending is generally softer, as is residential construction activity. House prices have returned to more sustainable levels.
• Inbound tourism activity is supporting spending, as is the flood rebuilds, although the RBNZ expects broader government spending to moderate as a share of GDP (adjusted for inflation).
• All in all, the RBNZ appears happy with its current policy stance. The restrictive stance will be maintained in the near term, with further tightening likely to be dependent on upside inflation/growth surprises. Note we get Q2 inflation data next Tuesday.