New Zealand keeps rates steady, sees loose policy for some time

By Stella Qiu

WELLINGTON, Feb 18 (Reuters) - New Zealand's central bank held its interest rates steady on Wednesday, as widely expected, adding that monetary policy needs to remain accommodative for some time to support the economic recovery.

Wrapping up its first meeting chaired by Governor Anna Breman, the Reserve Bank of New Zealand kept its benchmark official cash rate unchanged at 2.25% but brought its forecast of the first rate hike to near the year end or early next year.

"If the economy evolves as expected, monetary policy is likely to remain accommodative for some time," said the RBNZ.

"As the recovery strengthens and inflation falls sustainably towards the target mid-point, monetary policy settings will gradually normalise."

The kiwi dollar NZD=D3 slid 0.5% to $0.6022, and two-year swap rates NZDSM3NB2Y= slipped 3 basis points to 2.9786%, the lowest since January 19, while markets pared the chance for a rate hike in September to 53%, from almost 70% before the decision. An October hike is now seen as an 84% chance, from being fully priced before.

The minutes from the meeting showed one board member noted monetary stimulus could be withdrawn somewhat earlier if the economy recovers as expected.

The closely watched OCR track now shows the RBNZ is forecasting the cash rate will be 2.38% by the end of the year, implying some possibility of a rate hike. That compared with the November forecast of mid-2027 being the window for a possible rate hike.

"With the economy still facing headwinds in the form of weak housing market activity and subdued government spending, the Bank continues to forecast that the negative output gap will only close by end-2028," said Abhijit Surya, Senior APAC Economist at Capital Economics.

"That said, the Bank does seem open to withdrawing policy accommodation sooner than it had previously signalled."

BREMAN KEEN TO ESTABLISH 'FIGHTING CREDENTIALS'

A global front-runner in withdrawing pandemic-era monetary stimulus, the RBNZ aggressively lifted rates by 525 basis points between October 2021 and September 2023 to curb inflation. It has since cut rates by 325 bps to lift the economy out of a recession.

All eyes are on the post-decision press conference by Breman, the bank's first female governor, at 1500 local time (0200 GMT).

"On the one hand, she'll want to establish her inflation fighting credentials and acknowledge that both activity and inflation are a bit higher than expected, but at the same time not scare the horses," said Sharon Zollner, chief economist at ANZ.

"There's been a very sudden turn. For many people, it would have been quite unexpected that the conversation changed from how low can rates go to how high are they going to go?"

Indeed, the economy returned to growth in the third quarter but only after a long period of outright decline. Employers added to their headcount for the first time in over a year but the jobless rate hit a decade high of 5.4% and New Zealand saw another big year of losing its citizens mainly to its bigger neighbour Australia.

The housing market remained soft in January, with prices unable to extend the small lift seen at the end of last year. Property markets in main cities like Auckland and Wellington are still down over 20% from their peaks around late 2021.

Expectations of rate hikes have already lifted two-year swap rates NZDSM3NB2Y=, a key benchmark for lenders setting mortgage rates, by almost 40 basis points since the RBNZ's last policy meeting in November.