RBNZ Leaves OCR Unch; Says Lower NZD Needed for Growth, Infla

--Keeps OCR Track Unchanged Vs May

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of New Zealand left its official cash rate

unchanged at 1.75% Thursday and projected an interest rate path that was

unchanged from May, but the language on exchange rate and inflation signaled

that downside risks have increased.

     The projection continued to show the OCR would remain unchanged until

mid-2019, in contrast to market pricing for the first hike by around September

next year. 

     The RBNZ maintained the outlook that monetary policy will remain

accommodative for a considerable period. "Numerous uncertainties remain and

policy may need to adjust accordingly," the RBNZ reiterated.

     A key change in the statement was the jawboning of the exchange rate, with

the RBNZ saying that a lower New Zealand dollar is needed both to increase

tradables inflation and help deliver more balanced growth. In June, the RBNZ

merely said "a lower New Zealand dollar would help rebalance the growth outlook

towards the tradables sector."

     Another shift was the reason cited for the rise in the exchange rate. This

time the RBNZ said the increase was partly in response to a weaker New Zealand

dollar whereas in June it said it was partly in response to higher export

prices.

     The reason for the currency move is important because it has implications

for growth and inflation -- a gain in the exchange rate due to rise in commodity

prices could lead to stronger growth and inflation, but it's not the same if the

main reason is a weaker U.S. dollar.

     The commentary on inflation also suggested downside risks to the OCR. The

RBNZ said the outlook for tradables inflation remains weak and that headline

inflation is likely to decline in coming quarters as the effects of higher fuel

and food prices dissipate.

     On growth, the RBNZ appeared slightly more positive, citing an elevated

terms of trade,  along with strong population growth, accommodative monetary

policy and the fiscal stimulus as factors supporting growth. There was no

mention of construction which was missing in the June OCR statement too.

     The commentary on global growth was positive but the RBNZ maintained that

on-going spare capacity remained a challenge. A key change was omission of

"extensive policy uncertainty" that was cited in June as a challenge for global

growth.

     The RBNZ also said bond yields are low, credit spreads have narrowed and

equity prices are at record levels.

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

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