(Bloomberg) — New Zealand’s central bank signaled it may need to raise interest rates slightly earlier than previously expected as capacity pressures and a weaker currency stoke inflation. The local dollar rose.
“Monetary policy will remain accommodative for a considerable period,” Reserve Bank Acting Governor Grant Spencer said in a statement Thursday after keeping the official cash rate at 1.75 percent, a record low. Still, the central bank said inflation will reach its 2 percent target much sooner than previously expected, and it brought forward its forecast for a rate hike to the second quarter of 2019 from the third.
The New Zealand dollar’s 8 percent decline since late July and the new government’s policies to increase spending and investment may stoke price pressures, even as economic growth softens. Investors and economists expect the RBNZ to raise rates by the end of 2018.
The kiwi dollar jumped more than a third of a U.S. cent on the statement, buying 69.48 cents at 9:15 a.m. in Wellington from 69.24 cents beforehand.
The exchange rate has eased since the August statement and, if sustained, “will increase tradables inflation and promote more balanced growth,” Spencer said.
The currency has dropped after the Sept. 23 election led to the first change in government in nine years. The new Labour-led administration was sworn in late October and details of many of its policies are yet to be disclosed.
Labour’s plans to limit immigration, stop foreign speculation in the housing market and raise the minimum wage could curb economic growth, while increasing payments to families and new infrastructure projects may underpin consumption and demand. The new government is also considering adding employment to the objectives of the Reserve Bank Act and moving the RBNZ to committee-based decision making.
“The bank has incorporated preliminary estimates of the impact of new government policies in four areas: new government spending; the KiwiBuild program; tighter visa requirements; and increases in the minimum wage,” Spencer said. “The impact of these policies remains very uncertain.”
All 16 economists surveyed by Bloomberg expected today’s decision, and most forecast the benchmark rate will remain at 1.75 percent until the final quarter of 2018. There is a 98 percent chance of a rate rise by November next year, according to swaps data compiled by Bloomberg.
The RBNZ increased its projections for near-term inflation reflecting an increase in price pressures seen earlier this year, and the impact of a weaker currency. Its now sees inflation slowing to 1.5 percent by the first quarter of 2018 before rebounding to reach the 2 percent midpoint of the 1-3 percent target in the second quarter. That’s 9 months earlier than forecast in the August monetary policy statement.
“Non-tradables inflation is moderate but expected to increase gradually as capacity pressures increase,” Spencer said. “Tradables inflation has increased due to the lower New Zealand dollar and higher oil prices, but is expected to soften in line with projected low global inflation. Overall, CPI inflation is projected to remain near the midpoint of the target range and longer-term inflation expectations are well anchored at 2 percent.”