RBNZ Will Probably Not Raise Interest Rates Until 2012

The RBNZ left the OCR unchanged at 2.5% and delivered a less hawkish statement in September. Where these have been widely expected, NZD fell after the announcement as the chance of a rate hike this year has markedly reduced given global economic uncertainty. The central bank also trimmed growth and inflation forecasts, signaled the macroeconomic shock in the US and Europe would have some impacts on New Zealand's path of recovery.

Concerning global economic developments, the central bank noted that the global economy has slowed 'sharply'. Financial market sentiment has 'deteriorated' and if the tightening condition of in international bank funding markets does not improve, New Zealand bank funding costs will increase.

Fortunately, the global turmoil has not yet affected New Zealand's economy significantly. According to Governor Bollard, the country's economy has 'performed relatively well while headline inflation has increased' somewhat from 3 months ago. However, risks remained there and will likely increase in the second half of the year. Exports will be negatively affected as New Zealand's trading partners has 'deteriorated markedly' and New Zealand dollar has appreciated a lot against major currencies. The RBNZ warned that strength in NZD is having a 'dampening influence on some parts of the tradable sector and on imported inflation'.

In the quarterly MPS, the RBNZ lower its growth forecasts for the year ended March 2012 to +3.6% and March 2013 to +2.6% from June's projections of +4.4% and +3.6% respectively. The downward revisions were to large extent driven by the reductions in trading partners' growth. Inflation forecasts were also trimmed and CPI is expected to rise to +2.1% in March 2012 and then ease to +2.0% in March 2013 before soaring to +2.2% in March 2014.

While keeping the policy rate unchanged, given 'the recent intensification in global economic and financial risks', at this meeting, the RBNZ continued to forecast a future rate hike, if 'recent global developments have only a mild impact on the New Zealand economy'. Yet, it seems that policymakers will wait until 2012 for the first hike as suggested by the 90-day bill rate.