New Zealand central bank keeps rates on hold

Kiwi steady ahead of MPS

"We're still very much in the neutral stage where for the foreseeable future we don't see the OCR (official cash rate) increasing", said Wheeler, addressing his last monetary policy news conference before his five-year term ends next month.

CPI came into the middle of its 1% to 3% target band for the first time since 2011 in the first three months of the year, but fell to an annual 1.7% after the cost of fuel and airfare fell, with price growth flat in the second quarter. The bank maintained its forecast that rates won't rise until the third quarter of 2019, and lowered its projections for inflation. It slowed to 1.7 percent in the June quarter, and the RBNZ today predicted the rate will drop to 0.7 percent in the first quarter of 2018 - lower than it previously expected. In theory, the Reserve Bank should be able to use its Official Cash Rate and its forecasting ability to run the economy as fast as it can without generating inflation much faster than 2.0 percent. Treasury estimated past year the NAIRU was around 4.25 percent. Yet, it affirmed growth would pick up, thanks to growing population, elevated terms of trade and fiscal stimulus.

"We had a 70% decline in oil prices, we had a 75% decline in whole milk powder prices. The ability to forecast those is highly hard to say the least".

"But we also knew that monetary policy is enormously hard to calibrate - there's judgements about lags and transmission mechanisms. There are judgments about lags and transmission mechanisms so that is why we always refer to over the medium term and on average and those sorts of concepts".

The trade-weighted exchange rate has increased by almost 4% since May, partly in response to higher export prices.

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Rates were raised four times, he reminded us.

The central bank said capacity pressures would gradually push non-tradables inflation higher and reiterated the risk of house prices rising again. New Zealand's terms of trade were at a 40-year high, oil prices were over US$100 a barrel, whole milk powder prices very high, the market was pricing in OCR tightening and the International Monetary Fund was forecasting a positive output gap (as was the RBNZ).

"In the current environment, if a central bank is not very upset about currency appreciation, it's a green light to go further".

So I think the test is: do you make appropriate decisions based on information you have available at the time and then, if that information changes on you, do you then make appropriate decisions to modify your views. With the benefit of hindsight, did the bank tighten too quickly then?

He has had a low-key approach to the job during his five years but was criticised by some commentators for the abortive rate rises in 2014 which had to be reversed as inflation fell to multi-year lows, and for giving what were interpreted as mixed signals and jumbled communications. It's not the whole story - far from it, there's an very bad lot of other things happening. "So if you ask 'were those tests met?', I am comfortable that the bank meets those tests".

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