New Zealand central bank hold rates, signals accommodative policy through 2020

[WELLINGTON] New Zealand's central bank on Wednesday held the official cash rate (OCR) at a record low of 1.75 per cent and emphasised that policy will remain accommodative for a considerable period as risks to economic growth increased.

"The direction of our next OCR move could be up or down," Reserve Bank of New Zealand (RBNZ) governor Adrian Orr said in a statement accompanying the policy decision.

Orr said the central bank expects to keep rates at their current level through 2019 and 2020.

The RBNZ forecast rates at 1.84 per cent in December 2020, pulling back from an earlier prediction of 2.0 per cent by then. Rates did not cross 2 per cent until September 2021 in the latest projections..

The New Zealand dollar jumped 1.3 per cent to a one-week high of US$0.6827 after the decision as many in the market had positioned for a more dovish stance. The currency last stood at US$0.6799.

Over recent weeks markets had been betting on a clear easing bias in the face of rising global pressure and as a number of major central banks, including the neighbouring Reserve Bank of Australia (RBA), downgraded growth forecasts.

The RBNZ acknowledged ramped up international risks, especially the chance of a sharper downturn in key trading partners' growth, but said that these were tempered by domestic factors.

"Despite the weaker global impetus, we expect low interest rates and government spending to support a pick-up in New Zealand's GDP growth over 2019," Mr Orr said.

That more optimistic outlook came despite recent figures showing economic growth slumped to 0.3 per cent in the third quarter, its slowest pace in nearly five years and missing the bank's forecast of 0.7 per cent.

"The statement reinforces the 'lower for longer' view. But both our and the RBNZ's OCR views are contingent on the economy regaining momentum over 2019," said ASB chief economist Nick Tuffley.

"The strength (or otherwise) of the economy this year will be pivotal to whether the RBNZ remain on hold or does indeed cut the OCR."


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