New Zealand holds interest rate at record low

Reserve Bank governor Graeme Wheeler's five-year term ends next month

Reserve Bank governor Graeme Wheeler's five-year term ends next month

"Numerous uncertainties remain and policy may need to adjust accordingly", Mr Wheeler said in a statement.

The bank made no changes to its official cash rate forecasts, which project rates will rise in early 2020.

The RBNZ's surprisingly cautious tone in recent months has been justified by the latest data.

Given all that - and let's also give him points for inflation at least being in the lower part of the band rather than the higher part - would Wheeler have taken this situation by the time of his last press conference if it had been offered to him five years ago?

The RBNZ said in the statement that the trade-weighted exchange rate had risen since the last monetary policy statement in May partly in response to a weaker USA dollar and said that a lower dollar would help increase tradables inflation and achieve more balanced growth.

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The New Zealand dollar gained slightly against the USA dollar as the central bank held to its previous tone. The kiwi has climbed more than 7 percent against the greenback since the RBNZ's last set of forecasts on May 11.

It notes that the exchange rate increased since May monetary policy largely due to a weaker dollar. The front fell off many commodity markets. Swaps data show about an 80 percent chance of an increase by next August.

Graeme Wheeler held his neutral stance in his last monetary policy decision this week, but the focus was on his defence of his record as an inflation targeter. "Milk powder prices were very high, the market was expecting a tightening and they were pricing that in, the terms of trade were at a 40 year high, the International Monetary Fund like ourselves was forecasting a positive output gap, and I think it was a reasonable judgment on the information that we had available", he said.

Consumer Price inflation averaged 0.9 percent over his five year term and rose over that 2.0 percent midpoint for just one of the 18 quarters he was in charge.

A long run of inflation lower than that mid-point and unemployment above its full employment level (the NAIRU or Non Accelerating Inflation Rate of Unemployment) suggests the bank has run monetary policy too tight because it estimated the economy's "red line" at a lower level than it actually was, and had been running it too slow to hit that real full capacity. Headline inflation likely to decline in coming quarters as the effects of higher fuel and food prices dissipate.

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Growth is expected to improve going forward, supported by accommodative monetary policy, strong population growth, elevated terms of trade, and the fiscal stimulus outlined in Budget 2017. Growth will accelerate to 3.8 percent in the year to March from 2.5 percent in March this year, the RBNZ predicted.

In the first quarter of this year, New Zealand's economy grew a below trend 0.5%, after an anemic 0.4% expansion in the fourth quarter blamed on temporary factors including an natural disaster. Employment unexpectedly declined in the second quarter as firms became more cautious, and wage inflation remains subdued.

The RBNZ also said it favoured a lower New Zealand dollar, although it avoided bold language, prompting a brief jump in the local currency.

House price inflation continued to moderate due to loan-to-value ratio restrictions, affordability constraints, and a tightening in credit conditions. RBNZ expects moderation to persist but the risk remains due to population growth and resource constraints.

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