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RBNZ likely to leave the OCR unchanged at 1.75% – ANZ

Analysts at ANZ expect the RBNZ will leave the OCR unchanged at 1.75% at its Monetary Policy Statement next Thursday at 9am.

Key Quotes

“Since the May Monetary Policy Statement, we’ve talked a lot about how the economic landscape appears to be shifting. The RBNZ will be confronted with this shift as it prepares for next week’s Statement.”

Inflation looks set to lift and the CPI outlook is perhaps a bit stronger at the margin.”

“The economy is near maximum sustainable employment.  But the outlook for employment and activity is looking less assured and downside risks have increased.”

With growth slowing but inflation rising, the RBNZ faces a trade”‘off.”

Policy deliberations for the August Statement will – and should – be focused on the policy tension that the RBNZ faces and how it sees the balance of risks.“

Rising inflation is being driven in large part by transitory cost-push factors  – minimum wage increases, tax changes, and higher oil prices. Credible, flexible inflation-targeting central banks like the RBNZ can accommodate such cost-push disturbances, provided inflation expectations are well anchored, implying the effects will dissipate.”

“Going forward,  the RBNZ will be watching core inflation, inflation expectations and underlying wage pressures closely  to ensure that their strategy remains the right approach.”

It’s important to note that the RBNZ is still more concerned about core inflation being too low than too high.”

Two key risks will be front of mind  in policy discussions. On the one hand,  there is a risk that activity slows more than anticipated, potentially moving the labour market away from maximum sustainable employment and eroding underlying inflation pressures.  On the other side is the risk that as CPI inflation lifts, inflation expectations become unanchored.”

On balance, we expect that the  outlook for the OCR will be similar to that projected in the May MPS, signalling an increase in the OCR at the end of 2019 – far enough ahead that the RBNZ can alter their strategy as the policy trade-offs and economic conditions change.”

We expect to see the RBNZ reiterate its recent neutral messaging, even though an OCR cut now looks less likely.”

If inflation increases in line with our expectations, the OCR will eventually need to rise – but not any time soon.  We continue to pencil in late-2019 for an eventual hike, but a lot could – and probably will – happen between now and then.”

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