RBNZ’s August statement comes in more dovish than we had anticipated. While leaving the OCR unchanged at 1.75%, the members pushed backward expectations for the next interest rate adjustment. Moreover, they pushed back the timing for inflation to reach the +2% target. New Zealand dollar slumped after the announcement. NZDUSD plunged to as low as 0.6662, a level not seen since early 2016, before stabilizing. AUDNZD has rallied by about +1.5% on expectations that RBA would increase interest rates earlier than RBNZ.

The central bank reiterated the stance that “the direction of our next OCR move could be up or down”. Yet, it added that the OCR would be kept at current level through 2019 and into 2020, longer than what had been projected in the May statement. The members acknowledged the slowdown in economic growth. However, they remained confident that economic growth would “pick up pace over the rest of this year and be maintained through 2019”, despite recent slowdown. The members were upbeat over the job market, noting that it has “tightened over the past year” and “employment is roughly around its maximum sustainable level”. They expected that the unemployment rate would “decline modestly from its current level”.

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Concerning inflation, policymakers acknowledged the rise in core CPI and affirmed that inflation would increase towards +2% over the projection period as capacity pressures bite. They remained cautious towards the outlook, indicating that the path might be “bumpy”, with “one-off price changes from global oil prices, a lower exchange rate, and announced petrol excise tax rises expected”. As we suggested, the members decided to look through the volatility and “only respond to any persistent movements in inflation”. Meanwhile, RBNZ pushed back its 2% mid-target inflation forecast early 2021.

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