RBNZ unmoved in policy stance

The Reserve Bank of New Zealand made no changes to its outlook for the removal of monetary stimulus in a decision announced this morning. Recent data vindicated the doubts it seemed to have had on the sustainability of the recovery when it first indicated it may withdraw stimulus around the middle of 2010.

As expected, RBNZ kept its Official Cash Rate unchanged at 2.5 per cent and reiterated that it expects "to begin removing policy stimulus around the middle of 2010".  In its monetary policy statement published in December 2009, the RBNZ had for the first time turned hawkish when it subtly changed the core language of its policy stance by saying it may remove the stimulus in mid-2010, instead of committing to keep OCR at the current level until the middle of 2010.

The RBNZ may have seemed hawkish,  but analysts believed even waiting until the middle of the year was too long.

However, data released since then showed growth in the third quarter was worse than the RBNZ's projection. Gross domestic product rose 0.2 per cent in the quarter ended September 2009, and fell short of RBNZ's estimate for a 0.4 per cent growth.

The Consumer Price Index in New Zealand, however, met the RBNZ's expectations when it contracted 0.2 per cent in the quarter ended Dec. 31, surprising many market experts. The RBNZ indicated its comfort over CPI when it said it today's statement "Annual CPI inflation is currently at the centre of the target band, and is expected to track comfortably within the band over the medium term".

In Australia the outlook is a lot more hawkish, with the Australian inflation measures published yesterday showing a persistence in the measure of underlying inflation (in the manner in which the Reserve Bank of Australia likes to measure things), though there was a slight dip in the level of the consumer price index over one quarter and one year.

Prominent financial market economists have reiterated their view that the RBA is likely to lift the cash rate in Australia by 25 basis points next week, and for the fourth month in a row, even though interest rate futures pricing has suggested a February rate rise is not as likely.