RBNZ Expects to Keep Cash Rate at Record Low Until Mid-2019

Updated on
  • Central bank cuts inflation forecasts amid slower growth
  • Governor Spencer expects kiwi dollar to weaken over time

The Reserve Bank of New Zealand (RBNZ) headquarters in Wellington, New Zealand.

Photographer: Mark Coote/Bloomberg

New Zealand’s central bank held interest rates at a record low and projected they will stay there until mid-2019 as inflation remains subdued amid slower economic growth.

“Monetary policy will remain accommodative for a considerable period,” Reserve Bank Acting Governor Grant Spencer said Thursday in Wellington after keeping the official cash rate at 1.75 percent. The RBNZ maintained its view that it will start to raise the OCR in the second quarter of next year.

The benchmark has been at an historic low for more than a year as New Zealand’s strong exchange rate and weak global inflation exert downward pressure on prices. The RBNZ today lowered its inflation forecasts after the kiwi dollar’s 6 percent gain the past two months and a slump in business confidence following the election of a Labour-led government last year.

The bank now expects inflation to reach the midpoint of its 1-3 percent target in the third quarter of 2020, two years later than previously forecast.

“A clear theme of inflation remaining lower for longer is emerging,” said Nick Tuffley, chief economist for ASB Bank Ltd. in Auckland. “The risk is the RBNZ can afford to wait longer until lifting the OCR than our long-held view of February 2019.”

Bottom of the Range

RBNZ now sees inflation under 2% until 2020

Source: Statistics New Zealand, RBNZ

The kiwi dollar fell after the statement, trading at 72.20 U.S. cents at 9:47 a.m. in Wellington from 72.57 cents beforehand. The currency has surged against a weaker U.S. dollar this year after dropping to a 17-month low in mid-November.

“The exchange rate has firmed since the November statement, due in large part to a weak U.S. dollar," Spencer said. “We assume the trade weighted exchange rate will ease over the projection period.”

A majority of economists now expect the first rate hike in 2019 after a Jan. 25 report showed consumer prices rose less than forecast. Investors now see a 56 percent chance of an increase late this year, according to swaps data compiled by Bloomberg. That’s down from 100 percent in November.

The RBNZ has been weighing the potential impact of Prime Minister Jacinda Ardern’s policies around immigration, housing, welfare and industrial relations on economic activity.

Spencer said the bank has reviewed its estimates and “the net impact of these policies has been revised down in the near term.” The economic growth profile is “weaker in the near term but stronger in the medium term,” he said.

Gross domestic product will rise 3.1 percent in the first quarter of 2018 from a year earlier, down from 3.8 percent in the November projection, before quickening to 3.5 percent by the first quarter of 2019.

Slower Inflation

Inflation will slow to 1.1 percent this quarter from 1.6 percent in the previous quarter, the RBNZ projected. Inflation won’t reach the 2 percent midpoint of its target range until the third quarter of 2020, it said.

“While oil and food prices have recently increased, traded goods inflation is projected to remain subdued through the forecast period,” Spencer said. “Non-tradable inflation is moderate but expected to increase in line with increasing capacity pressures. Overall, CPI inflation is forecast to trend upwards towards the midpoint of the target range.”

Today’s decision comes as the government reviews the Reserve Bank Act with the intention of adding full employment to the bank’s mandate alongside price stability. A new governor, Adrian Orr, will take over from Spencer in late March.

“There is a lot of water under the bridge anyway until the RBNZ needs to lift interest rates: a new governor, an added monetary policy objective, and the continued bedding in of a new government and fine-tuning of what that means for future inflation pressures,” said Tuffley.

(Updates with economist comment in fifth paragraph.)
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