-Graeme Wheeler, RBNZ Governor
The Reserve Bank of New Zealand left its official cash rate on hold and pledged to keep it unchanged for up to two years, as a strong New Zealand Dollar and lower oil prices hold down inflation. Governor Graeme Wheeler kept the benchmark rate at 3.5% in line with expectations, leaving the OCR unchanged since July to let assess the impact of four earlier rate hikes. RBNZ's Governor said that the nation's inflation is predicted to remain low this year before gradually moving back to the 2% mid—level of the RBNZ's 1%-3% target band. The high exchange rate is one of the key factors taking the wind out of any inflationary pressures in New Zealand, as well as the recent sharp falls in global petrol prices. The RBNZ raised concerns that inflation expectations may be falling, and said that looser monetary policy settings might be warranted if expectations were to decline dramatically. While the central bank is less worried about the short-term effect of low petrol prices on inflation, it is much more concerned that inflation expectations could become anchored below the 2% target midpoint, which would lead to lower wage and price settings, and in the worst case, result in a deflationary spiral. According to Statistics New Zealand, the annual CPI fell from 1.0% in the third quarter to just 0.8% in the December quarter, marking the first time in over a year that inflation broke below the RBNZ's 1-3% medium-term target range.
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