At the meeting on Thursday, the RBNZ left the key interest rate at a record low level of 2.0% and indicated possibility of suspension of plans for further monetary policy easing in the country due to concerns about the real estate market.
The RBNZ has lowered interest rate for 6 times since June 2015. Last decrease took place in August when the Bank has lowered the rate by 0.25% and confirmed adherence to the monetary easing policy.
In the summer the RBNZ issued report, stating that the continuing low inflation and the rise in the New Zealand currency, which adds pressure on dairy and manufacturing industry, are the negative factors for economic development of the country. Recall that Graham Wheeler said further monetary easing policy will be required in order to reach average level of inflation in the target range of 1% -3%.
GDP growth in New Zealand in Q 2 was better than expected, but it does not mean that maintenance of the interest rate at the current level will be sufficient to preserve and maintain growth in the economy of New Zealand, which largely depends on export prices for commodities, particularly milk powder. The results of the dairy products auction last Wednesday were disappointing. The price of milk powder, which is the main item of export of the country, rose only by 1.7% against the forecast of 9%.
However, housing prices in New Zealand are growing, especially in the large cities, and the rapid decline in the interest rates can heat up the real estate market. This fact will stop the Bank from the decisions to lower rates. Now, market participants expect that the RBNZ will lower the key interest rate to 1.50% by August 2017.
US Fed's policy has also a strong impact on the pair NZD/USD. Last week the Fed kept rate unchanged at the level of 0.5%. At the same time Fed stated that the rate hike will be implemented gradually. This fact caused the decline in the USD and boosted the US stock market. Now, probability of the rate hike in December is estimated at 60%, which will support the USD and the pair NZD/USD.
Next meeting of the RBNZ will take place on 9 November. The pair NZD/USD is likely to decline until this date.