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RBNZ set to keep interest rates on hold

NZ Newswire logoNZ Newswire 7/05/2017 Rebecca Howard

The Reserve Bank is widely expected to keep interest rates on hold on Thursday.

But growing signs of inflationary pressure and a weaker New Zealand dollar mean it may signal rate hikes by late 2018 rather than 2019.

The central bank has kept the official cash rate on hold at 1.75 per cent since last November.

Its latest forecast - in the February monetary policy statement - signals rate hikes by September 2019.

While economists unanimously expect rates to remain on hold Thursday, most are expecting the bank's forecast to now indicate an increase by late 2018.

"The RBNZ's prior projection for no move in the official cash rate until late 2019 is now implausible. We expect the bank to pull forward the start of normalisation to late 2018," said UBS economist Robin Clements.

Economists point to the fact that first-quarter inflation figures were stronger than the central bank had anticipated after headline annual inflation rose to 2.2 per cent, well above the RBNZ's forecast of 1.5 per cent.

It also meant that headline inflation hit the mid-point of its 1 per cent-to-3 per cent target range for the first time since 2011.

The bank didn't expect inflation to be 2 per cent until mid-2019, according to its latest forecast.

They also note that inflation expectations - a key indicator for the bank - have pushed higher. The high kiwi dollar - long a thorn in the central bank's side - is now trading at 75.14 on a trade-weighed index basis, 5 per cent below the 79 forecast by the bank for the March quarter.

"We expect the Reserve Bank to hold the OCR at 1.75 per cent, but with a stronger signal that the next move in rates will be up," said Westpac acting NZ chief economist Michael Gordon.

"We expect the RBNZ's interest rate projections to be more consistent with an OCR hike by late 2018," he added.

Capital Economics economist Kate Hickie agrees that the central bank might rejig the forecasts but warns markets have gone too far, in particular given the subdued wage growth.

Data last week showed the unemployment rate fell to 4.9 per cent in the three months ended March 31 from 5.2 per cent in the December quarter but total annual wage inflation was 1.6 per cent higher on the year in the March quarter.

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