Graeme Wheeler. Photo: Lynn Grieveson

In his last innings as head of the Reserve Bank, Graeme Wheeler was expected to play with a straight bat. BusinessDesk‘s Paul McBeth reports

Reserve Bank governor Graeme Wheeler kept the official cash rate at 1.75 percent with future projections unchanged, disappointing some analysts who had been tipping an even later start to a tightening cycle.

“Monetary policy will remain accommodative for a considerable period,” Wheeler said in a statement.

“Numerous uncertainties remain and policy may need to adjust accordingly.”

All 11 economists polled by Bloomberg expected Wheeler to keep the benchmark rate unchanged, although a run of weaker economic data including slower growth, lower inflation and softer jobs growth has seen some analysts predicting the central bank could further delay any projected increases.

The RBNZ kept its forecast for the OCR unchanged at 1.8 percent until September 2019 when it creeps up to 1.9 percent, with a quarter-point increase not fully predicted until March 2020. The latest forecast includes the September 2020 quarter with the OCR rising to 2.1 percent.

In a note before the release, Bank of New Zealand currency strategist Jason Wong said he expected Wheeler “to play with a straight bat in his final showing as governor” and that the “underlying message will be that the RBNZ is in no hurry to join some other major central banks in looking to remove policy accommodation.”

The period of low inflation has been a global phenomenon and for the likes of New Zealand has been compounded by major central banks’ ultra-loose monetary policy settings making the relatively high domestic interest rates stoke demand for the currency.

The central bank scaled back its forecast for inflation for the next three quarters by about half a percentage point, predicting annual consumer price index inflation of 1.6 percent in the September quarter and 1.3 percent in December and falling to 0.7 percent in March next year, back below the RBNZ’s 1-to-3 percent target band. It’s then seen rising in subsequent quarters, reaching the 2 percent mid-point target in March 2019.

“Headline inflation is likely to decline in coming quarters as the effects of higher fuel and food prices dissipate,” Wheeler said.

“The outlook for tradables inflation remains weak. Non-tradables inflation remains moderate but is expected to increase gradually as capacity pressure increases, bringing headline inflation to the midpoint of the target range over the medium term.”

Wheeler didn’t ramp up his rhetoric on the currency, which has been overshooting the RBNZ’s May forecast, noting the trade-weighted index had increased in part due to the weaker greenback and reiterating that “a lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth.”

The kiwi dollar initially spiked about 20 basis points, but was left little changed at 73.40 US cents from 73.37 cents immediately before the release, and at 77.38 on the TWI from 77.34.

The Reserve Bank lifted its projections for the TWI, seeing it holding at 77 or higher until the December quarter of this year before falling to 75.7 in December 2019. It had previously seen it averaging 75.8 in the September quarter, falling to 75.3 by March next year.

Wheeler noted weaker economic growth in the March quarter than expected and a softening through the tail-end of last year but was optimistic it would improve “supported by accommodative monetary policy, strong population growth, an elevated terms of trade, and the fiscal stimulus outlined in Budget 2017.”

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