RBNZ Stands Pat, Sees Need For Prolonged Stimulus

The RBNZ delivered a widely expected decision to leave its main MonPol settings unchanged and tipped hat to a pick-up in global economic activity, but sought to nip any nascent hawkish expectations in the bud by pointing to uncertainties ahead, stressing that recovery has been uneven and highlighting the need for prolonged monetary support. Policymakers expressed readiness to add stimulus if needed and reminded that the banking system is operationally ready for negative interest rates.

• The MPC refrained from publishing its forecast for the OCR beyond the current quarter. At the same time, there has been a notable shift higher in the RBNZ's unconstrained OCR track. As a reminder, back in 2020 policymakers pledged to keep the OCR unchanged through March 2021.
• A string of strong data releases seen since the Nov MPS prompted the RBNZ to revise its economic forecasts higher across all key metrics. CPI is expected to accelerate to +1.7% Y/Y in Q2 vs. the +0.6% projected before, with unemployment expected at 5.0% rather than 6.2%. The annual GDP change in the March quarter is now seen at -2.4% Y/Y vs. -4.2% predicted in the Nov MPS.
• Policymakers worked under the assumption that New Zealand will remain at Covid alert level 1 or lower over the scenario period and border restrictions will remain in place through the year-end, with no travel bubbles introduced before 2022.
• The MPC "agreed to continue with the LSAP programme with purchases of up to NZ$100bn by June 2022" and noted that "weekly changes in the LSAP do not represent a change in monetary policy stance," brushing away speculation that reductions in the pace of bond-buying could already be some form of subtle policy normalisation.
• On the FX front, the MPC concluded that a strong NZD has offset some of the impact of strong international prices for NZ exports