RBNZ Keeps Rates Steady; Retains Neutral Stance

WELLINGTON, New Zealand -- The Reserve Bank of New Zealand kept rates on hold Thursday after CPI inflation flatlined in the second quarter.

"Numerous uncertainties remain and policy may need to adjust accordingly," RBNZ Gov. Graeme Wheeler said after the decision to leave the official cash rate at 1.75%.

Gov. Wheeler also said that headline inflation is likely to decline in coming quarters as the effects of higher fuel and food prices dissipate.

The RBNZ's decision was widely expected by economists and also comes after a surprise fall in the second quarter employment rate and comparatively sluggish GDP growth.

In the first quarter of this year, New Zealand's economy grew a below trend 0.5%, after an anemic 0.4% expansion in the fourth quarter blamed on temporary factors including an earthquake.

The RBNZ doesn't project higher rates until the third quarter of 2019, according to its forecasts released in the accompanying monetary policy statement, in line with its previous predictions.

The RBNZ lowered its expectations for inflation through 2018 and 2019.

Despite the RBNZ's dovish stance on rates, the kiwi dollar in trade weighted terms has been on the rise, a concern for the central bank since it is likely to put downward pressure on prices.

The trade-weighted exchange rate has increased by nearly 4% since May, partly in response to higher export prices. "A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth," Gov. Wheeler said.

The RBNZ has been balancing a nascent recovery in inflation against the demands of a frothy housing market, which is now showing some signs of cooling thanks to loan-to-value restrictions and banks lifting mortgage rates independent of the official cash rate.

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 New Zealand dollar was little changed against the greenback after the announcement.

Write to Ben Collins at ben.collins@wsj.com

(END) Dow Jones Newswires

August 09, 2017 17:34 ET (21:34 GMT)