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RBNZ brings forward rate-hike forecast on faster inflation

[WELLINGTON] New Zealand's central bank signaled that interest rates may need to rise slightly earlier than previously expected as it revised up inflation forecasts. The local dollar rose.

"Monetary policy will remain accommodative for a considerable period," Reserve Bank Acting Governor Grant Spencer reiterated on Thursday after keeping the official cash rate at 1.75 per cent, a record low. Still, "the exchange rate has eased since the August statement and, if sustained, will increase tradables inflation and promote more balanced growth."

The central bank now expects inflation to reach the midpoint of its 1 per cent to 3 per cent target in the second quarter of next year, nine months sooner than previously forecast, as capacity pressures and a weaker currency stoke consumer prices. It brought forward projections for a rate hike to the second quarter of 2019 from the third.

New Zealand's dollar has slumped about 7 per cent since late July and the new coalition government's policies of higher spending and investment may stoke price pressures, even as economic growth softens. Investors and economists are expecting rates to rise even sooner than the RBNZ forecasts, with most predicting a hike by the end of 2018.

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"For now, the RBNZ has opened the door the tiniest crack in the direction of earlier OCR hikes than previously advertised," said Dominick Stephens, chief economist for New Zealand at Westpac Banking Corp. "But in our view, over the course of 2018 the RBNZ will be disappointed by the state of economic growth and will become more dovish."

The kiwi dollar jumped more than a third of a US cent on the governor's statement before easing to 69.57 cents at 10.55am in Wellington from 69.24 cents beforehand.

The currency has dropped after the Sept 23 election led to the first change in government in nine years.

Mr Spencer said he was "happy" with the current exchange rate and it was in the "vicinity of fair value" in a briefing with reporters in Wellington after Thursday's decision.

The new Labour-led administration was sworn in in late October and details of many of its policies are yet to be disclosed.

Plans to limit immigration, stop foreign speculation in the housing market and raise the minimum wage could curb economic growth, while increasing payments to families and new infrastructure projects may underpin consumption and demand.

In his statement, Mr Spencer said the central bank has incorporated preliminary estimates of the impact of the new policies in four areas: spending, home-building, tighter visa requirements and the minimum wage. "The impact of these policies remains very uncertain," he said in the statement.

The new government is also considering adding employment to the objectives of the Reserve Bank Act and moving the RBNZ to committee-based decision making.

All 16 economists surveyed by Bloomberg expected today's decision, and most forecast the benchmark rate will remain at 1.75 per cent until the final quarter of 2018.

There is a 99 per cent chance of a rate rise by November next year, according to swaps data compiled by Bloomberg.

New Zealand's economic expansion continues to be underpinned by low borrowing costs and immigration, but won't be as strong as previously expected amid a slowdown in the housing market and capacity constraints that have hurt construction, the RBNZ said Thursday.

Gross domestic product will rise 3.8 per cent in the first quarter of 2018 from a year earlier, unchanged from the August projection, before slowing to 3.1 per cent by the first quarter of 2019.

BLOOMBERG

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