PREVIEW-New Zealand’s central bank to retain record low rates amid BNZ controversy

Reuters




* RBNZ seen keeping rates at record lows of 1.75 percent
    * C.bank expected to remain firmly neutral
    * Emphasis on neutral position could rattle markets-Westpac
    * Decision due 2100 GMT Wed. 9am Thur local time

    By Ana Nicolaci da CostaWELLINGTON, June 19 (Reuters) - The Reserve Bank of New
Zealand is widely expected to keep interest rates at record lows
and to retain a neutral bias this week - a position that has
already sparked a controversy between the RBNZ and a large
financial institution. [nL8N1JA024]
    None of the 26 economists polled by Reuters expect the RBNZ
to move on June 22. [nL3N1JG1VB]
    First quarter growth underwhelmed market expectations,
vindicating a decision not to raise rates but manufacturing and
services data already point to a rebound in the second quarter.
[nL8N1JC0AJ].
    The Reserve Bank wrote in protest to the Bank of New Zealand
last month, complaining that the language used in BNZ's May
rates preview questioned the central bank's integrity.
     BNZ said on May 8 it would be "negligent" of the central
bank not to admit a tightening bias in its rate projections at
its May meeting. It said the central bank would not raise rates
then regardless of conditions for fear of getting "egg
splattered all over its face".
    BNZ expects rates to rise as soon as the first quarter of
2018 and sees them at 2.50 percent by the third quarter of that
year, although its preview lacks colourful language this time
around:
    "We are still struggling to reconcile the fact we have
policy interest rates down at levels that are normally seen in,
or reserved for, times of recession," it said in a note.
    Westpac economists said the Reserve Bank of New Zealand was
unlikely to stray from a "firmly neutral tone" and could even
reinforce it. The RBNZ held rates at 1.75 percent in May,
reiterating monetary policy "will remain accommodative for a
considerable period of time".
    "There is a risk that next week's statement could emphasise
the equal likelihood of rate cuts or hikes. That could rattle
financial markets, which are largely focusing on rate hike
scenarios," Westpac said in a research note previewing
Thursday's decision.

    BNZ CONTROVERSY
    Central bank Governor Graeme Wheeler, who has sole
responsibility for setting rates, said in a letter to BNZ's
chief executive on May 11 that negligence was a "serious
accusation".
    "To bring into question the Bank's integrity while
fundamentally misrepresenting how the Reserve Bank formulates
policy is unacceptable," he wrote in the letter made available
in June after a local media requested it under the Official
Information Act.
    To write such a letter was an unusual move for the head of
an independent central bank in an advanced economy, particularly
one that directly regulates banks.
    The fact the letter did not cause more controversy
indicated the central bank's power, analysts said.
    "If you are a bank, you probably would be hesitant to attack
the RBNZ in public because they are also regulating you," said
Oliver Hartwich, executive director of The New Zealand
Initiative think tank, adding that the letter raised questions
about the conduct of rates policy and bank regulation in New
Zealand.
    "Is it really desirable to have all the monetary policy
power vested in one person? ...And the next question is whether
it is right to have the banking supervision functions and
monetary policy in one body."

 (Reporting by Ana Nicolaci da Costa; Editing by Eric Meijer)
 ((ana.dacosta@thomsonreuters.com; +64 27 352 8960; Reuters
Messaging: ana.nicolacidacosta.thomsonreuters.com@reuters.net))

Keywords: NEWZEALAND RBNZ/RATES (PREVIEW)





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