RBNZ surprises by staying in neutral

The Reserve Bank is forecasting the OCR will remain on hold at 1.75 percent until the second half of 2019. That is unchanged from its February MPS forecasts.

The Reserve Bank has surprised currency markets and economists by sticking to its neutral stance on monetary policy and leaving its forecast for the Official Cash Rate (OCR) unchanged from its last set of forecasts in February.

Back then, the Reserve Bank forecast it would not start increasing the OCR until the second half of 2019. Many economists had expected the Reserve Bank to shift to a mild tightening stance in its May Monetary Policy Statement today and to bring forward its forecast for the first rate hike to the early-to-mid 2018. The surprisingly dovish statement and forecast drove the New Zealand dollar down almost a cent to 68.5 USc in morning trade.

As expected, the Reserve Bank left the OCR on hold at 1.75 and used the same neutral stance on monetary policy in its opening statement. It reinforced that the risks were still evenly balanced, and left its forecast track for the OCR unchanged. The spreadsheet issued with with the MPS showed it did not expect the OCR to rise until the September quarter of 2019, which was unchanged from February.

Here is the key quote from the MPS: "Premature tightening of policy could undermine growth, causing inflation to persistently undershoot the target midpoint. Further policy easing, in an attempt to see non-tradables inflation strengthen more quickly, would risk generating unnecessary volatility in the economy."

Governor Graeme Wheeler's opening statement referring to monetary policy was also unchanged in substance. Here are the last three OCR summary paragraphs.

May 11 -"Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly."

March 23 - "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."

February 9 - "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."

The only change today was to drop the line about uncertainties in the international outlook.

We will have more detail from the news conference and the Governor's select committee appearance in tomorrow morning's email.