MNI STATE OF PLAY: RBNZ To Hold OCR; Focus on Exch Rate Path

By Sophia Rodrigues

     SYDNEY (MNI) - A more optimistic global growth outlook and a positive

outlook for the local economy are likely to be the key themes of the Reserve

Bank of New Zealand's monetary policy decision, but a more subdued local

inflation outlook means the accommodative stance is expected to continue.

     The OCR decision is due Thursday at 9 am local time (2000 GMT Wednesday),

and both the market and economists expect the rate to remain unchanged at 1.75%.

The decision and the outlook will be based on updated forecasts for the economy

to be published in the quarterly Monetary Policy Statement (MPS), due at the

same time. 

     The main interest for the market is whether the RBNZ will maintain the OCR

projections from the November statement. A slightly higher New Zealand dollar

and a downgrade in the inflation outlook, mainly following weaker-than-expected

Q4 inflation, could result in a small downward tweak but overall the track is

unlikely to look much different from November.

     --TRADABLES INFLATION

     The main challenge for the RBNZ is to make a judgement on whether an

improved outlook for global inflation means tradables inflation would rise in

New Zealand or whether the higher exchange rate would continue to be a bigger

dampener for tradables inflation.

     In November, the RBNZ said that the weaker exchange rate, if sustained,

will increase tradables inflation and promote more balanced growth but it also

said that tradables inflation could soften in line with projected low global

inflation. 

     Since it may be too early to make a judgement, the RBNZ may rely on its

exchange rate projection to avoid any significant downward revision to the

tradable inflation outlook.

     In November, the RBNZ assumed an unchanged trade-weighted exchange rate

track of 73.5 through the forecast period. This was intentional because any

lower track in line with the downward pressure on the exchange rate at that

time, would have caused a higher inflation projection and may have forced a

higher OCR track.

     This time, the RBNZ is facing a different problem. An unchanged track based

on the current exchange rate could result in a lower inflation projection and a

lower OCR track while a slightly weaker exchange rate track would allow it to

maintain the November OCR projection. The RBNZ may opt for the latter.

     RBNZ acting governor Grant Spencer is due to hold a media conference at

10am local time (2100 GMT Wednesday) to explain the central bank's decision and

outlook.  This will be his second and final MPS release before new governor

Adrian Orr takes over on March 27, and could be an additional reason for the

RBNZ not to make any significant changes to the monetary policy outlook.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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