Business Scoop

RBNZ keeps OCR at 1.5%, signals more easing likely

Article – BusinessDesk

June 26 (BusinessDesk) – The Reserve Bank kept the official cash rate at 1.5 percent and left the door open for further rate cuts as the outlook for the economy has softened since its assessment in May.

By Rebecca Howard

June 26 (BusinessDesk) – The Reserve Bank kept the official cash rate at 1.5 percent and left the door open for further rate cuts as the outlook for the economy has softened since its assessment in May.

“Given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower OCR may be needed over time to continue to meet our objectives,” the central bank said in a statement.

All 20 economists polled by Bloomberg had expected the central bank to remain on hold.

The New Zealand dollar lifted slightly after the announcement, recently trading at 66.48 US cents.

The summary of the meeting said the monetary policy committee discussed a possible rate cut today, but reached a consensus to keep the OCR unchanged. However, “the members agreed that more support from monetary policy was likely to be necessary.”

The central bank reiterated that domestic growth has slowed over the past year. While construction activity strengthened in the March 2019 quarter, growth in the services sector continued to slow. Softer house prices and subdued business sentiment continue to dampen domestic spending.

Government figures last week showed gross domestic product expanded 0.6 percent in the three months to March 31 and was 2.5 percent higher than the same quarter a year earlier. The RBNZ had predicted quarterly growth of 0.4 percent.

The committee noted domestic GDP growth had held up more than projected in the March 2019 quarter. The members discussed disparities in growth across sectors of the economy, with strength in construction and weaker services industries. The members also discussed whether some of the factors supporting March quarter growth would continue.

They also noted two largely offsetting developments affecting the outlook for domestic growth: softer house price inflation and more fiscal stimulus than they expected. The government’s 2019 budget incorporated a stronger outlook for government spending than assumed in the Reserve Bank’s May statement.

On the global front, the central bank said the economic outlook has weakened, and downside risks related to trade activity have intensified. It noted that a number of central banks are easing their monetary policy settings to support demand.

The Reserve Bank of Australia and European Central Bank have both signalled easier policy is in the wings. The US Federal Reserve also dropped its pledge to remain “patient” and instead says it will “act as appropriate”, which analysts interpret as indicating the world’s biggest central bank will start cutting its benchmark rate.

New Zealand’s central bank said it expects low interest rates and increased government spending to support a lift in economic growth and employment. It also said inflation is expected to rise to the 2 percent mid-point of its target range, and employment will remain near its maximum sustainable level.

The committee agreed risks to achieving its consumer price inflation and maximum sustainable employment objectives are tilted to the downside.

Given “the downside risks around the employment and inflation outlook, a lower OCR may be needed,” the RBNZ said.

New Zealand’s central bank now has a dual mandate to support maximum sustainable employment and keep annual inflation between 1 percent and 3 percent over the medium term, with a focus on the mid-point of 2 percent. The consumers price index rose 0.1 percent in the March quarter, bringing the annual rate of inflation to 1.5 percent, down from a 1.9 percent pace in December.

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