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Reserve Bank of New Zealand Holds Rates Steady -- Update

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11/09/2017 | 01:32am CET
By Ben Collins 

WELLINGTON, New Zealand -- The Reserve Bank of New Zealand left interest rates unchanged as expected at a policy meeting Thursday, but acknowledged a somewhat improved economic outlook supported by a sharply lower currency and rising commodity prices.

Acting Gov. Grant Spencer said the official cash rate had been left at a record low of 1.75%. He cited ongoing uncertainties around the outlook, not the least of which was a new Labour-led coalition government that has pledged to overhaul the workings of the central bank by broadening its mandate to include an employment objective.

The New Zealand dollar has fallen by 6% since elections in September as global investors fret over the new government's direction on key issues around migration and housing.

Gov. Spencer said modeling to assess the impact of new government policies is under way, with the key areas being new government spending, infrastructure spending, tighter visa requirements and a likely rise in the minimum wage.

The currency's retreat prompted the RBNZ to move forward its timetable for interest-rate increases slightly, but it hinted more aggressive action is likely if the currency remains weak.

"Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly, " Gov. Spencer said.

"The exchange rate has eased since the August Statement and, if sustained, will increase tradables inflation and promote more balanced growth," he added.

Still, interest rates aren't expected to be moved until mid-2019.

Gov. Spencer indicated the New Zealand dollar was now much less of a headwind to higher economic growth and stronger inflation, saying current levels around 70 U.S. cents were far more sustainable.

David deGaris, senior economist at National Australia Bank, said the RBNZ has adopted "a clear tightening bias."

"They seem to have gotten rid of the notion of rate cuts in what looks to be a first step toward beginning the normalization of rates," he added.

Imre Speizer, currency strategist at Westpac, said the RBNZ was "certainly more hawkish" than expected by the market, and the New Zealand dollar responded by rallying sharply.

Recent data have been supportive of the RBNZ's more upbeat stance. New Zealand's consumer prices regained some strength in the third quarter, driven by rising housing costs and more expensive food. And the country's unemployment rate also fell again in the third quarter, sliding to 4.6% from 4.8% three months earlier.

Meanwhile, the country's agriculture-rich economy bounced back from six months of anemic growth in the second quarter, supported by high migration flows, solid commodity prices and record-low interest rates. Homeowners are enjoying wealth gains through soaring property prices, which have cooled lately but remain high.

However, business confidence fell to its lowest level in two years after New Zealand's recent general election, which saw the Labour-led coalition headed by Prime Minister Jacinda Ardern replace the center-right government, which had been in power for nearly a decade. The reading was taken before her power-sharing agreement was finalized, leading some economists to expect it to dip even lower when the next round of data are released.

Write to Ben Collins at ben.collins @wsj.com

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