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RBNZ keeps OCR at record low 1.75pc

NZ Newswire logoNZ Newswire 21/06/2017

The Reserve Bank has kept the official cash rate at its record low of 1.75 per cent.

Bank governor Graeme Wheeler confirmed the widely anticipated move on Thursday morning, saying he would look through a recent pick-up in inflation - seen as being a temporary spike in the tradables sector - while also lamenting the local currency's strength over the past month.

"The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices," Mr Wheeler said in a statement.

"These effects are temporary and may lead to some variability in headline inflation."

The central bank surprised some in the market last month when it reaffirmed its neutral bias, with inflation expectations appearing well-anchored and slower-than-anticipated economic growth meaning capacity hadn't been as stretched as policymakers feared.

A rate hike isn't fully priced in until March 2020.

Mr Wheeler again said long-term inflation expectations were anchored at about 2 per cent and that while non-tradable and wage inflation is "moderate", both are expected to "increase gradually".

He affirmed monetary policy would stay "accommodative for a considerable period", but may need to be adjusted as "numerous uncertainties remain".

Mr Wheeler tried to talk down the currency, with the trade-weighted index trading about 2.6 per cent higher than the central bank's projected average for the June quarter, saying it had advanced 3 per cent since May, partly due to rising export prices.

Government figures this month showed the country's terms of trade are at a 44-year high.

"A lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector," Mr Wheeler said.

The kiwi jumped about half a US cent after the release, and recently traded at US72.51c from US72.23c.

The trade-weighted index was at 78.26 from 77.99 before the release.

Government data last week showed New Zealand's economy grew 0.5 per cent in the first three months of the year, short of the central bank's forecast expansion of 0.9 per cent, reinforcing the view among economists that Mr Wheeler would be able to keep his neutral bias.

Mr Wheeler said economic expansion was slower than anticipated due to weaker export volumes and residential building work, but that the growth outlook was still positive, "supported by accommodative monetary policy, strong population growth, and high terms of trade".

"Recent changes announced in Budget 2017 should support the outlook for growth," he said.

House price inflation was seen slowing down, in part due to the loan-to-value lending restrictions, and Mr Wheeler said that moderation is expected to continue, although there was a risk of a resurgence in the protracted imbalance between supply and demand.

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