RBNZ sees rates on hold until 2020/21

The Reserve Bank has held its official cash rate at 1.75 percent as expected, and has forecast it won't need to hike interest rates until 2020 and 2021, and then only slowly, because inflation pressures were moderate.

The Reserve Bank updated its November forecast for the OCR in its February monetary policy statement, which will be the last by acting Governor Grant Spencer before the arrival on March 27 of new Governor Adrian Orr. It left its November forecast track unchanged at 1.8 percent for 2018 and 2019, before a slight increase to 1.9 percent in 2020 and a new forecast of 2.2 percent in 2021. This would imply just one or two rate hikes over the next four years.

The Reserve Bank said GDP growth eased over the second half of 2017, but was expected to strengthen, driven by accommodative monetary policy, high terms of trade, government spending and population growth. Labour market conditions continued to tighten, it said.

"Compared to the November Statement, the growth profile is weaker in the near term but stronger in the medium term," the Reserve Bank said in the opening statement of its MPS.

"The Bank has revised its November estimates of the impact of government policies on economic activity based on Treasury’s HYEFU. The net impact of these policies has been revised down in the near term. The Kiwibuild programme contributes to residential investment growth from 2019," it said.

It noted annual CPI inflation in December was lower than expected at 1.6 percent, due to weakness in manufactured goods prices.

"While oil and food prices have recently increased, traded goods inflation is projected to remain subdued through the forecast period. Non-tradable inflation is moderate but expected to increase in line with increasing capacity pressures. Overall, CPI inflation is forecast to trend upwards towards the midpoint of the target range. Longer-term inflation expectations are well anchored at 2 percent," it said.

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