We expect the RBNZ to hold the OCR at 1.75% at the February Monetary Policy Statement, a widely-anticipated outcome. The inflation outlook has firmed since the November MPS, particularly for 2017. This should offer a greater degree of comfort for the RBNZ, with a reduced risk of inflation remaining uncomfortably low in the near term. But there are still a number of risks to the downside for inflation, key among which is the impact of new US President Donald Trump’s economic and trade policies on NZ.
There is scope for the RBNZ to be a little more neutral in its outlook at this meeting, compared to November. This follows the firmer-than-expected Q4 CPI result of 1.3% yoy, the first time inflation moved back inside the target band for over 2 years. Even with a more neutral outlook, we still expect the OCR to remain on-hold through to late 2018.
The tricky balancing-act for the RBNZ will be to express more comfort over the inflation outlook, yet still give a clear message that OCR increases are still a long way off. Failure to strike the right balance could prompt an unwanted reaction from financial markets.