Analysis – The Reserve Bank (RBNZ) is expected to reach for the same song sheet it used in February and April when it releases its latest quarterly monetary policy statement (MPS).

No captionThe RBNZ last year adopted a “least regrets” policy, meaning it would do whatever needed to support the economy and financial system through the Covid-19 pandemic (file image). Photo: RNZ / Samuel Rillstone

That means the central bank will hold its official cash rate at 0.25 percent, and leave other key policies – the Large Scale Asset Programme (LSAP) and Funding for Lending Programme (FLP) – unchanged.

The RBNZ last year adopted a “least regrets” policy, meaning it would do whatever was needed to support the economy and financial system through the Covid-19 pandemic, even if there were unpalatable side effects.

But the economy has been performing solidly and seems to have perked up from the soft spot seen at the end of 2020, when growth contracted 1 percent, although caution looks like it will remain the word of the day.

ASB economist Nathaniel Keall said “the RBNZ will see a lot of virtue in keeping its options open at this MPS. Policy levers will remain broadly unchanged, and the bank will emphasise its willingness to keep policy accommodative for as long as necessary”.

The tone of the statement is expected to remain dovish, with talk of uncertainty, and the RBNZ still short of its key objectives on inflation and employment.

The central bank is required to get inflation anchored around 2 percent, and to maximise employment.

Getting there slowly

On both issues the RBNZ would appear to be inching closer to its objectives.

The latest labour market report surprised with unemployment edging down to 4.7 percent, while consumer and business prices have been picking up. driven by supply disruptions and rising energy costs.

The argument now flowing between policy makers, economists, and observers is how real and permanent are the inflationary pressures, an issue which Kiwibank economist said should be addressed by the RBNZ.

“We expect to see a more detailed discussion around the cost-push inflationary wave, and whether or not the RBNZ deems the surge to be transitory,” they said in a note.

The RBNZ has in the past said it would be willing to let inflation run above its target point – a likely result of letting the economy run hot.

“We believe the RBNZ, like most central banks, will wait for the labour market to fully recover, at the risk of some inflation,” Kiwibank said.

Unemployment before the pandemic touched a low of 4.2 percent, a level which the RBNZ said was meeting its expectation, and the number thrown out of work by the pandemic never reached the 10 percent or 11 percent initially feared.

Monetary conditions are turning, but expectations are that the RBNZ does not want to admit it too fully or too early, lest it raises hopes of a change sooner than it feels necessary.

Financial markets have already started betting on the OCR rising in the second half of next year.

Jarden Securities’ economist John Carran said the RBNZ would have to acknowledge changing circumstances and the need for policy change at some stage.

“Markets will start to focus on that and …. [they] may start to expect an earlier rate hike than the Reserve Bank is currently thinking, so you could see some ups and downs in things like the New Zealand dollar and wholesale interest rates as the tussle between the two views takes place.”