New Zealand maintains rate but rate cut now more likely

March 27, 2019

By CentralBankNews.info
      New Zealand’s central bank left its benchmark official cash rate (OCR) steady at 1.75 percent, as expected, but joined the growing number of central banks that are shifting toward easier monetary policy by saying “the more likely direction of our next OCR move is down” given the weaker global economic outlook and reduced momentum in domestic spending.
      It is the second, but a clear move by Reserve Bank of New Zealand (RBNZ) to prepare financial markets of  easier monetary policy following its statement in February that the next rate move could be “up or down.”
      This compared with its statement in November 2018 when it said the next move would be dependent on economic data and it expected to keep OCR steady through this year and into 2020.
      In today’s statement, RBNZ did not repeat it expected to maintain the rate in 2019 and into 2020.
      Although RBNZ said employment is near its maximum sustainable level, inflation remains below its target range, which calls for a continued supportive monetary policy, and the balance of risks have shifted to the downside as the risk of a more pronounced global downturn has risen and low business investment weights on domestic spending.
     RBNZ has clearly turned more pessimistic about the outlook for global growth as in February it said there were both upside and downside risks to its outlook.
      “We will keep the OCR at an expansionary level for a considerable period to contribute to maximizing sustainable employment, and maintaining low and stable inflation,” RBNZ said, reiterating its guidance from February, which references the central bank’s new dual mandate of keeping inflation between 1 and 3 percent, with a focus near 2 percent, while also supporting maximum sustainable employment.
     New Zealand’s dollar, known as the kiwi, has been appreciating since October last year but fell more than one percent today after RBNZ’s decision to 1.47 to the U.S. dollar, though it is still up 1.4 percent since the start of this year.
     New Zealand’s inflation rate was steady at 1.9 percent in the fourth quarter of last year while the economy grew an annual 2.3 percent, down from 2.6 percent in the third quarter.

   
     The Reserve Bank of New Zealand issued the following statement:

“The Official Cash Rate (OCR) remains at 1.75 percent. Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down.
Employment is near its maximum sustainable level. However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy.
The global economic outlook has continued to weaken, in particular amongst some of our key trading partners including Australia, Europe, and China. This weaker outlook has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar.
Domestic growth slowed in 2018, with softness in the housing market and weak business investment contributing.
We expect ongoing low interest rates, and increased government spending and investment, to support economic growth over 2019. Low interest rates, and continued employment growth, should support household spending and business investment. Government spending on infrastructure, housing, and transfer payments also supports domestic demand.
As capacity pressures build, consumer price inflation is expected to rise to around the mid-point of our target range at 2 percent.
The balance of risks to this outlook has shifted to the downside. The risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending. On the upside, inflation could rise faster if firms pass on cost increases to prices to a greater extent.
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.”
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