Reserve Bank leaves Official Cash Rate unchanged at 1.75%; Governor now says next move won’t occur till 2020; still sees next move as either up or down

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By David Hargreaves

Reserve Bank Governor Adrian Orr now says the next official interest rate move will not be till 2020 – after earlier forecasting it would be next year.

Orr is still saying the next move could be either up or down.

The Kiwi dollar dropped after the ‘dovish’ announcement from the Governor, from about US67.5 just before the announcement to 67.1c.

As expected, the Official Cash Rate was left unchanged on Thursday at 1.75%, where it has now been since October 2016.

The bank’s latest Monetary Policy Statement indicates that the timing of the next move in the OCR has been shifted by a whole year since the last MPS in May.

The first forecast rise in the OCR is now forecast to occur in September 2020, compared with September 2019 in the last statement.

CPI inflation is now tipped to be somewhat stronger through the rest of this year, while GDP growth is forecast to be somewhat slower.

However, the bank’s GDP forecasts for next year are rather stronger than those in the May MPS and are pointing to 0.9% quarterly increases after the first quarter of 2019 and through the rest of the year.

Given recent low business confidence figures and indications of future activity, the RBNZ’s forecasts for growing GDP next year are likely to be seen as surprising and may strike some credibility problems in a market that is seeing slowing GDP growth ahead.

Orr concedes that “risks remain” to the bank’s central forecast.

“The recent moderation in growth could last longer. Low business confidence can affect employment and investment decisions.

“Conversely, there is a chance that inflation could increase faster if cost pressures can pass through into higher prices and impact inflation expectations.”

This is Orr’s statement:

The Official Cash Rate (OCR) remains at 1.75 percent. We expect to keep the OCR at this level through 2019 and into 2020, longer than we projected in our May Statement. The direction of our next OCR move could be up or down.

While recent economic growth has moderated, we expect it to pick up pace over the rest of this year and be maintained through 2019.

Robust global growth and a lower New Zealand dollar exchange rate will support export earnings. At home, capacity and labour constraints promote business investment, supported by low interest rates. Government spending and investment is also set to rise, while residential construction and household spending remain solid.

The labour market has tightened over the past year and employment is roughly around its maximum sustainable level. We expect the unemployment rate to decline modestly from its current level.

There are welcome early signs of core inflation rising. Inflation will increase towards 2 percent over the projection period as capacity pressures bite. This path may be bumpy however, with one-off price changes from global oil prices, a lower exchange rate, and announced petrol excise tax rises expected. We will look through this volatility as appropriate, and only respond to any persistent movements in inflation.

Risks remain to our central forecast. The recent moderation in growth could last longer. Low business confidence can affect employment and investment decisions. Conversely, there is a chance that inflation could increase faster if cost pressures can pass through into higher prices and impact inflation expectations.

We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.

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