Yesterday, Alan Bollard of the Reserve Bank of New Zealand (RBNZ) announced that the central bank has decided to leave the country’s Official Cash Rate (OCR) steady at 2.50% for the 12th straight time.
According to Bollard, there have been signs of improvement in New Zealand’s economy but it was offset by the government’s plans for fiscal consolidation and the persistently strong Kiwi. Bollard also cited external threats like several euro-area economies falling into recession and the slowdown China.
Despite all these risks to New Zealand’s economy, the RNBZ still projects that the country will expand 2.4% next year, 2.9% in 2014, and 2.2% in 2015. Inflation doesn’t seem to be an issue for the central bank too as Bollard said that it was under control. It fell to 1% during the second quarter but the RBNZ expects to rise to the middle of its 1-3% inflation target in the medium term.
As for interest rates, Bollard didn’t exactly say when the bank would start raising rates again. However, he did mention that the 90-day bank bill rate would probably remain unchanged for a year or so, suggesting that the OCR could also stay at 2.50%. Since the 90-day bank bill rate and the OCR are heavily positively correlated, the 90-day bank bill rate is good leading indicator of the OCR.
Truth be told, the market hardly reacted to the RBNZ rate decision, and the lack of activity on NZD/USD wasn’t all too surprising. After all, most of what was announced was pretty much expected. But even so, we can’t deny that we did learn a thing or two about where the Kiwi could go in the future.
According to the central bank’s own forecasts, based on the trade-weighted index, the Kiwi probably won’t see sub-70 levels until mid-2014. In other words, unless we see a drastic change in market conditions, the Kiwi will probably remain well-bid.
On another note, I’d like to take this opportunity to bid adieu to Alan Bollard, who will be stepping down in 2 weeks (September 25). Yesterday’s rate decision was his final one as RBNZ governor, after serving as the central bank‘s head for a decade.
Set to replace Bollard is Graeme Wheeler, who was once managing director of the World Bank and was touted as a potential World Bank president. With his credentials, he certainly seems qualified to steer the RBNZ in the right direction.
In the short term, under Wheeler’s rule, no major changes are expected to the central bank’s stance on monetary policy. But only time will tell if the new governor has what it takes to fill Bollard’s shoes.