RBNZ Holds Cash Rate at Record Low as Growth Outlook Weakens

  • Central bank steps back from expectation of faster growth
  • Tweaks language on desire for lower New Zealand dollar

RBNZ Stays on Hold at 1.75%

New Zealand’s central bank held interest rates at a record low and signaled it doesn’t expect to raise them for some time as the economic growth outlook weakens and inflation slows.

“Monetary policy will remain accommodative for a considerable period,” Reserve Bank Acting Governor Grant Spencer said in a statement Thursday after keeping the official cash rate at 1.75 percent. “Numerous uncertainties remain and policy may need to adjust accordingly.”

The New Zealand dollar fell as Spencer sounded more cautious on growth, adding to risks that interest rates may stay lower for longer. Spencer, who stepped into his caretaker role only two days ago after Graeme Wheeler’s five-year term ended, is also awaiting the formation of a government after an inconclusive general election, which could influence domestic demand.  

“The RBNZ was never going to strike a bold new tone at this OCR review, given the pall of uncertainty that has been cast by the election,” said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland. However, “the acknowledgment of a lower growth outlook was an important development that could hint in the direction of a more dovish November monetary policy statement,” he said.

New Zealand’s dollar fell after the statement, buying 72.02 U.S. cents at 10:02 a.m. in Wellington from 72.20 cents beforehand.

Slower Growth

Gross domestic product increased 0.8 percent in the second quarter, just missing the RBNZ’s projection of 0.9 percent, but economists predict growth will fall short of the central bank’s forecasts in the second half.

On Aug. 10, the bank said the economy would gather pace to expand 0.9 percent in the third quarter and 1 percent in the fourth. Today, Spencer said growth “is projected to maintain its current pace going forward.” New forecasts will be issued in the Nov. 9 policy statement.

All 15 economists surveyed by Bloomberg expected today’s decision, and most forecast the benchmark rate will remain at 1.75 percent until the third quarter of 2018. The RBNZ said in August it didn’t expect to raise borrowing costs until the second half of 2019.

“The RBNZ still can’t see much inflation on the horizon,” said Paul Dales, chief Australia and New Zealand economist at Capital Economics in Sydney. “It doesn’t think it will raise interest rates until the end of 2019, which makes it more dovish than central banks in most other advanced economies. At some point, this will surely weaken the New Zealand dollar below 70 U.S. cents.”

Spencer noted that the exchange rate has eased since August on a trade-weighted basis and tempered the bank’s message on its desire for further declines. He said a lower kiwi “would help” to increase tradables inflation rather than “is needed.”

Below Target

In its August projections, the RBNZ predicted inflation would drop to 0.7 percent in the first quarter of 2018, below the 1-3 percent range it targets, before returning to 2 percent by early 2018.

Spencer reiterated that “headline inflation is likely to decline in coming quarters” but still expected to return to target in the medium term.

While New Zealand’s economy has been expanding at a healthy clip the past several years, supported by immigration and booming tourism and construction, growth has stuttered as capacity constraints curb building activity. Business confidence also fell to a two-year low this month amid uncertainty over the election outcome.

The ruling National Party won 46 percent of votes at the Sept. 23 ballot but still needs to win the backing of the small New Zealand First Party and its maverick leader Winston Peters to achieve a majority. The opposition Labour Party and its ally the Greens, with a combined vote of 41.7 percent, will also talk to Peters in a bid to form an alternative administration.

Fiscal Policy

Analysts expect both National’s tax relief package and Labour’s proposal to boost payments to more families will increase spending in the economy, which may ultimately require an interest-rate response from the RBNZ. The wildcard remains what immigration, trade and foreign investment changes Peters may win, and what impact they have on economic expansion.

New Zealand’s housing market is also cooling, led by a drop in Auckland prices, which may reduce pressure on inflation and keep interest rates lower for longer. Annual house-price growth slowed to 0.5 percent in August from 1.2 percent in July, the Real Estate Institute of New Zealand said this month.

“This moderation is expected to continue, although there remains a risk of resurgence in prices given population growth and resource constraints in the construction sector,” Spencer said.

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