- RBNZ expected to keep rates steady at 1.75 percent
- RBNZ seen raising inflation forecast
- Central bank unlikely to budge on policy outlook
The Reserve Bank of New Zealand is all but certain to hold interest rates at record lows this week to support a slowing economy, as markets wait on the new government to map out its policies, including planned changes to the central bank mandate.
Analysts say the RBNZ will likely want to acknowledge the status quo by raising its inflation forecast, while sticking to its outlook on rates given new policy details are still scarce.
A Labour-led government is expected to be slightly looser fiscally, with ambitious plans to boost housing and eradicate child poverty, and has said it will review the central bank act to add employment as a focus to its policy mandate.
However, it is unclear when it will review the Reserve Bank Act. And changes to the policy targets agreement that sets out conditions for achieving price stability are only likely when the finance minister appoints a new RBNZ governor in March.
Uncertainty around the change in government and policies has knocked six percent off the New Zealand currency - the world's 11th most traded - since before the Sept. 23 election.
All 19 economists polled by Reuters expected the RBNZ to keep rates at record lows of 1.75 percent on Nov. 9, with twelve of 18 economists projecting hikes by the first quarter of 2019.
"The currency is substantially lower than what the Reserve Bank had assumed when it put together its previous monetary policy statement and we know that some of the policies that the current government will enact will be moderately inflationary," Stephen Toplis, head of research at the Bank New Zealand said.
"So you put those two bits together and you must end up with a higher short-term inflation forecast."
New Zealand's inflation rate jumped in the third quarter with the consumer price index rising 1.9 percent on an annual basis, well above the central bank's 1.6 percent forecast in August, but still below the top-end of its 1-3 percent target.
A central bank survey meanwhile showed on Monday inflation expectations for the next year rose in the fourth quarter.
ANZ said in a research note it expected the central bank to raise its inflation forecast for the first quarter of next year from 0.7 percent year on year currently.
"That (forecast) now looks unrealistic given the higher starting point, lower NZD and perhaps even what we have learned on the government policy front. A trough slightly above 1 percent is now more likely," it added.
Analysts also said the central bank could cut its growth projections, after it hinted at a lower growth outlook in September as a long construction boom lost momentum and against the backdrop of political uncertainty.
The RBNZ is expected to stick to recent language that "monetary policy will remain accommodative for a considerable period." Analysts say the central bank will be reluctant to make changes to rate projections so early on given the policy uncertainty.
"The election result has made the economic outlook so much more uncertain," Westpac said in a research note. "At this stage, the Reserve Bank is better off waiting and seeing what happens with Government policy, rather than reacting prematurely to policy changes that may or may not eventuate."
