RBNZ keeps rates on hold but drops talk of possible rate cut

Thursday 8th November 2018

Reserve Bank governor Adrian Orr kept the official cash rate at 1.75 percent as widely expected and while he said the central bank expects to keep it at this level into 2020, he pared back language around a possible rate cut.

"We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation," said Orr in the press release accompanying the monetary policy statement.

The New Zealand dollar fell to 67.80 US cents as at 9.15am versus 67.87 US cents just prior to the statement.

The press release did not include the line from the previous statement that the next move could be "up or down" but Orr did say "there are both upside and downside risks to our growth and inflation projections. As always, the timing and direction of any future OCR move remains data dependent."

The central bank's forecasts for where it expects the cash rate to be were unchanged. It still sees the OCR at 1.9 percent in September 2020 and a full-rate hike is still signaled by December 2020 when the benchmark rate is forecast to be 2 percent.

"Core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy," said Orr.

The Reserve Bank is charged with keeping annual inflation between 1 percent and 3 percent with a focus on the 2 percent mid-point, and with supporting maximum levels of sustainable employment within the economy. Official statistics yesterday showed unemployment at a decade-low 3.9 percent.

He noted that upside risks to the inflation outlook also exist.

"Higher fuel prices are boosting near-term headline inflation. We will look through this volatility as appropriate. Our projection assumes firms have limited pass through of higher costs into generalised consumer prices, and that longer-term inflation expectations remain anchored at our target," he said.

The central bank's forecasts now see annual inflation hitting the 2 percent target in December this year - largely due to impact of rising fuel prices - and remaining there for several quarters before dipping back down. It is firmly above 2.0 percent by June 2020 versus a prior forecast of March 2021.

The consumers' price index rose 0.9 percent in the three months ended Sept. 30 while annual inflation was 1.9 percent, according to government data.

All 15 economists polled by Bloomberg expected the OCR to remain on hold at a record low 1.75 percent today and the median of 11 expect rates to lift to 2 percent by the fourth quarter of 2019.

Regarding economic growth, Orr said GDP growth is expected to pick up over 2019 as monetary stimulus and population growth underpin household spending and business investment.

Government spending on infrastructure and housing also supports domestic demand.

"The level of the New Zealand dollar exchange rate will support export earnings," he said.

However, "downside risks to the growth outlook remain. Weak business sentiment could weigh on growth for longer. Trade tensions remain in some major economies, raising the risk that trade barriers increase and undermine global growth."

(BusinessDesk)

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