UPDATE: RBNZ Keeps OCR Unch; Lower NZD Needed for Growth, Infl

--Updated with comments from news conference

--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 the exchange rate and inflation

signaled downside risks have increased.

     The projection in the quarterly Monetary Policy Statement published

Thursday continued to show the OCR would remain unchanged until mid-2019 -- in

contrast to market pricing for a first rise by around September next year. 

     The RBNZ maintained its outlook that monetary policy will remain

accommodative for a considerable period. "Numerous uncertainties remain and

policy may need to adjust accordingly," the RBNZ said in its OCR statement.

     An important change in the statement was the discussion surrounding the

exchange rate with the RBNZ saying a lower New Zealand dollar is needed both to

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

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

toward the tradables sector."

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

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

dollar. 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 as a result of a rise in

commodity prices may lead to stronger growth and inflation -- but it isn't the

same if the main reason is a weaker U.S. dollar.

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

said the outlook for tradables inflation remained weak and headline inflation

was likely to decline in coming quarters as the effects of higher fuel and food

prices dissipated.

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

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

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

construction which was missing in the June OCR statement, too.

     The commentary on international growth was positive but the RBNZ maintained

that continuing spare capacity remained a challenge. An important change was the

omission of "extensive policy uncertainty" that was cited in June as a challenge

for global growth.

     The RBNZ also said bond yields were low, credit spreads had narrowed and

equity prices were at records.

     At a new conference later governor Graeme Wheeler said the RBNZ's forecast

for rise in nontradable inflation was based mainly on expectations of a positive

output gap.

     Wheeler said the RBNZ was forecasting annual GDP growth of 3.25% to 3.50%

for next couple of years and with the potential output growth forecast at 2.8%

the output gap was expected to turn positive from zero at present. This is

expected to lead to a rise in nontradable inflation, he said.

     Wheeler said while there were some negative developments since May,

including the higher exchange rate, low inflation, weaker GDP and housing market

there had been offsetting positives which included a broadening of worldwide

growth, stronger net migrations, high terms of trade and stimulatory fiscal

policy.

     The RBNZ weighed these developments and decided its policy stance needed to

remain neutral.

     "We are still very much in the neutral stage. For the foreseeable future we

don't see the OCR increasing," Wheeler said.

     Wheeler was pleased to see a slowing in house-price inflation but warned

that upside risks remained -- mainly from stronger immigration. In the past

house prices had slowed prior to government elections but then rebounded. That

was a probably a reference to general elections in New Zealand on Sept. 23.

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

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