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RBNZ Holds Cash Rate at Record Low on Weak Inflation Outlook

Updated on
  • Governor Spencer omits any comment on the New Zealand dollar
  • Rates expected to remain on hold until mid-2019: Westpac

New Zealand’s central bank held interest rates at a record low and indicated it doesn’t expect to raise them anytime soon as economic growth loses momentum and inflation remains subdued.

“Monetary policy will remain accommodative for a considerable period,” Reserve Bank Acting Governor Grant Spencer said in a statement Thursday in Wellington after keeping the official cash rate at 1.75 percent. “Inflation is expected to weaken further in the near term” before trending up toward the bank’s 2 percent target “over the medium term,” he said.

New Zealand’s benchmark rate has been at an historic low since November 2016 as exchange-rate strength and weak global inflation exert downward pressure on prices. Even as the Federal Reserve raises interest rates and says it is wary of emerging price pressure in the U.S., few economists expect an RBNZ rate increase before 2019.

New Zealand’s dollar was little changed after the statement, buying 72.36 U.S. cents at 9:20 a.m. in Wellington. Unusually, Spencer omitted any comment on the exchange rate in today’s statement.

Reduced Focus

“The RBNZ has been uncomfortable with the degree of market attention paid to its exchange rate comments, and was probably pleased to have an opportunity to further reduce the focus on the exchange rate,” said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland. Westpac still expects the RBNZ to keep the OCR on hold until mid- to late-2019, Stephens said.

All 16 economists surveyed by Bloomberg expected today’s decision, and most forecast the OCR will remain at 1.75 percent until next year. Traders have reduced bets on a rate rise this year, pricing just a 31 percent chance of a move, according to swaps data compiled by Bloomberg today.

Spencer, who has been in a caretaker role the past six months, steps down next week. New governor Adrian Orr will be charged with implementing the biggest reforms at the central bank in almost three decades as the government introduces a Fed-style dual mandate of full employment and price stability. It also proposes adding external members to the RBNZ’s policy committee.

The central bank signaled in February that rates would be unchanged until mid-2019, and since then economic growth hasn’t revived as much as it expected.

Economic Growth

Gross domestic product increased 0.6 percent in the fourth quarter, just missing the RBNZ’s projection of 0.7 percent, and economists predict growth in the first half will fall short of the central bank’s forecasts as business confidence remains weak.

“GDP was weaker than expected in the fourth quarter, mainly due to weather effects on agricultural production,” Spencer said. Still, “growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, government spending and population growth,” he said.

Slower growth adds to risks that inflation won’t pick up as quickly as the central bank expects. In its February projections, the RBNZ predicted inflation would lift to 1.8 percent by the end of 2018 -- near the midpoint of its 1-3 percent target range.

“Tradables inflation is projected to remain subdued through the forecast period,” Spencer said today. “Non-tradables inflation is moderate but is expected to increase in line with a rise in capacity pressure.”

Business Confidence

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 is only slowly recovering from the eight-year low hit in November as firms remain uncertain about how the new government’s policies will affect them.

Still, consumer confidence has rallied and the housing market has also stabilized after a rapid cooling in 2017. Annual house-price growth was 6.5 percent in February, Quotable Value New Zealand said this month.

“Residential construction continues to be hindered by capacity constraints,” Spencer said. “House price inflation remains moderate with restrained credit growth and weak house sales.”

(Updates with governor’s comments from second paragraph.)
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