The economic outlook has evolved broadly in line with the Monetary Policy Committee’s expectations, with signs that growth is still picking up, Reserve Bank of New Zealand (RBNZ) Governor Anna Breman said on Monday.
Key quotes
The economic outlook has developed broadly similar to that of the Monetary Policy Committee.
We continue to see signs that growth is recovering.
It repeats the forward path of the OCR published in the November MPS, indicating a slight possibility of another interest rate cut in the near term.
If economic conditions develop as expected, the OCR rate is likely to remain at its current level of 2.25% for some time.
Financial market conditions have tightened since the November decision, beyond what our central OCR expectations would indicate.
Market reaction
At the time of writing, NZD/USD was trading 0.27% lower on the day at 0.5787.
Reserve Bank of New Zealand FAQs
The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic goals are to achieve and maintain price stability – which is achieved when inflation, as measured by the consumer price index, falls within a range of 1% to 3% – and to support maximum sustainable employment.
The Monetary Policy Committee (MPC) of the Reserve Bank of New Zealand (RBNZ) decides the appropriate level of the official cash rate (OCR) in accordance with its objectives. When inflation is above target, the bank will try to tame it by raising the key OCR rate, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) because they lead to higher returns, making the country a more attractive place for investors. Conversely, low interest rates tend to weaken the New Zealand dollar.
Employment is important to the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The Reserve Bank of New Zealand’s target of “maximum sustainable employment” is defined as the highest use of labor resources that can be maintained over time without creating an acceleration in inflation. “When employment is at the maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise faster, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.
In extreme cases, the Reserve Bank of New Zealand (RBNZ) can activate a monetary policy tool called quantitative easing. Quantitative easing is the process by which the Reserve Bank of New Zealand prints domestic currency and uses it to purchase assets – typically government or corporate bonds – from banks and other financial institutions with the aim of increasing the domestic money supply and stimulating economic activity. Quantitative easing usually leads to a weaker New Zealand Dollar (NZD). Quantitative easing is a last resort when simply lowering interest rates is unlikely to achieve the central bank’s goals. The Reserve Bank of New Zealand has used it during the Covid-19 pandemic.
