RBNZ: OCR to remain on hold for an extended period - Westpac

Analysts at Westpac noted the RBNZ and now look to the Policy Targets Agreement.

Key Quotes:

"As expected, the Reserve Bank left the OCR unchanged at 1.75%, and continued to signal that it expects the OCR to remain on hold for an extended period. 

The RBNZ still expects that the economy will accelerate this year, eventually pulling inflation slowly up towards two percent. 

We doubt very much that the economy will accelerate as the RBNZ expects, but our expectation of exchange rate depreciation leaves us with an inflation outlook that is similar to the RBNZ’s. 

The main point is that both we and the RBNZ are much more dovish than financial market pricing, and comfortably so.

The most interesting aspect of today’s RBNZ statement was that it contained no reference at all to the exchange rate, for the first time since 2012. 

From here, attention will turn to the new Policy Targets Agreement between the Minister of Finance and the incoming Governor, to be signed within a day or two.

One possibility is that the new PTA will revert to a 1 – 3 percent target band for inflation, removing reference to the two percent midpoint. Historical experience suggests that this would become a de facto target of three percent.

We will be very interested in the exact wording of any reference to the labour market within the new PTA."