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By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of New Zealand's monetary policy stance
remains unchanged despite incorporating expectations of more fiscal stimulus
from the new government and a lower exchange rate based on the recent
depreciation of the New Zealand dollar.
     The RBNZ's outlook suggests the official cash rate will remain on hold for
longer, with its risk scenarios unchanged from August.
     As expected, the RBNZ left the official cash rate unchanged at 1.75% but a
key surprise was the fact that it had taken account of four of the new
government's policy initiatives in its forecasts even though there is no clarity
yet on the details of those policies.
     The four policies are: the government spending initiatives; the housing
programme; changes to visa requirements; and minimum wage increases. While the
RBNZ acknowledged that the effects of the policies on the economy are uncertain
and depend on how private households and businesses respond, it concluded that
there will be more fiscal stimulus than incorporated in its previous Monetary
Policy Statement in August.
     Overall, however, the RBNZ's assumptions on the stimulative effect of those
policies led to only a small upgrade in its GDP forecast, mainly because it is
expected to be offset by a weaker housing and construction.
     The forecasts for inflation have been raised slightly in the near term in
line with higher-than-expected inflation in the third quarter but overall they
are largely unchanged despite the assumed effect of a rise in the minimum wage.
     The RBNZ's main assumption with respect to inflation is that continued low
global inflation and limited further rises in commodity prices will result in
low tradables inflation in the medium-term. The overall outlook for
non-tradables inflation remains unchanged. 
     "Non-tradables inflation remains below average at 2.6%, consistent with
weak price-setting behaviour and limited capacity pressure. Housing-related
components have continued to support non-tradables inflation, along with
increases in insurance costs and some administrative prices," the RBNZ said.
     Significantly, the RBNZ kept the forecast for the trade-weighted exchange
rate unchanged through the forward projections, expecting the recent fall to be
sustained and feeding through to higher inflation. It is also assuming that the
recent weakening reflects reduced appetite from offshore investors for New
Zealand dollar assets rather than a deterioration in the domestic economic
     The two key risk scenarios were unchanged versus August:
     --global inflationary pressure increases more than expected; 
     --domestic capacity pressure is lower than projected, due to weaker growth
in consumption and residential investment activity.
     If the former risk materializes, the RBNZ expects the OCR to be 100 basis
points higher than its projection. The second risk would lower OCR by an equal
amount by the start of 2020.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email:
[TOPICS: MMNRB$,M$A$$$,M$N$$$,MT$$$$]

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