THE TAKEAWAY:The Reserve Bank of New Zealand could be set to hold rates at 2.5% after a trade surplus is seen but high unemployment and low CPI weigh on the economy.
Governor Graeme Wheeler of the Reserve Bank of New Zealand and his policy makers could be set to hold the Official Cash Rate unchanged at 2.5 per cent as unemployment reaches levels not observed since 1999 and CPI inflation remains below 1 per cent.
In their last Policy Target Agreement set in September of 2012, the Reserve Bank outlined that a CPI inflation outcome of between 1-3 per cent for the medium term and a 2 per cent target midpoint for the long term would be put in place. As the annual CPI inflation declined to 0.8 per cent in September of 2012 and then rose to 0.9 per cent in December, it seems that New Zealand could be moving in the right direction. Unemployment however, remains at a very high 7.30 per cent and given the Reserve Bank outlined unemployment as a key concern in its last announcement it seems unlikely that the Official Cash Rate will see higher levels in the medium term.
The last interest rate decision saw a rally in the New Zealand Dollar as investors saw more appeal in the high yielding currency. The so called “Kiwi” dollar could see a move higher tomorrow as investor confidence in a New Zealand recovery could see risk appetite rise, however given the recent rally in the Kiwi stemming from a surprise Trade Surplus, the scope for another large rally could be reduced.