Our take on the latest Monetary policy review (Wed 24 Feb 2021)
RBNZ states "Prolonged Monetary Stimulus Necessary"
No further stimulus needed at present
Question over what the next change might be
The key numbers...
- The Reserve Bank left current monetary policy settings unchanged today, with a firm stance that there’s no expectations to change monetary policy settings any time soon.
- A much better starting point and a more optimistic outlook were highlighted by the Bank, with the Reserve Bank now expecting unemployment to peak at 5.2% in 2021 – meaning the Bank expects the worst has passed.
- Inflation is now expected to hit 2.5% in 2021 as temporary pressures including supply chain issues push prices higher, but the Bank stated they would look through these temporary factors. Inflation is expected to rise above the 2% mid-point target in late 2023.
- The Monetary Policy Committee made it clear that monetary policy settings would remain stimulatory until “it is confident” that it is hitting its inflation and employment targets, and that it “expects a prolonged period of time to pass before these conditions are met.”
Unconstrained OCR
RBNZ estimates, quarterly average
...and our reaction
- The Reserve Bank made it clear it will not act prematurely and risk undoing the path to higher inflation and employment outcomes, instead content to take the path of “least regrets” to move only once it’s apparent that inflation and employment have risen and are holding at target levels.
- We still expect any change to the official cash rate (OCR) to be some way off, and we would expect the Reserve Bank will end their Large Scale Asset Purchase (LSAP) and Funding for Lending (FLP) programmes first, before OCR changes are considered.
- Looking ahead, we will be watching for the Bank’s plan for winding back LSAP and FLP – changes to these programmes would be a tightening of monetary policy, and the Reserve Bank’s unconstrained OCR track implies that changes are likely from 2022. These changes will be instructive to understand the path for interest rates going forward.
- We still expect interest rates to remain low over the next few years, with some minor falls possible in 2021.
Latest updates
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