Reserve Bank leaves Official Cash Rate unchanged at 1.75%; still sees upside and downside risks

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The Reserve Bank has as expected left the Official Cash Rate unchanged at 1.75% and says upside and downside risks continue to exist.

The OCR has now been unchanged for two years.

Despite recent economic developments exceeding RBNZ expectations – notably with inflation stronger than expected, economic growth better than expected, and Wednesday’s unemployment figures much lower than expected – the RBNZ has made little change to its outlook.

In what is perhaps a significant slight shift though, the statement put out by the RBNZ did remove explicit suggestion that the next interest rate move could be up or down – though such a potential move is still implicitly suggested by the wording in the statement.

At the media conference on Thursday Governor Adrian Orr said the RBNZ had not taken a rates cut “off the table” and said the bank remained “data dependent”.

The New Zealand dollar, which took off skyward after the release of the employment figures, was largely unmoved by the RBNZ announcement, at around US67.8c.

In projections contained in the Monetary Policy Statement released on Thursday, the RBNZ has left unchanged the starting point for interest rate rises at September 2020, even though it has substantially tweaked upwards its expectations of short term inflation.

More significantly perhaps, the central bank has revised upwardly its longer view of inflation and now sees the rate hitting 2.1% (which is above its explicit 2% aim) by December 2020. It sees it hitting 2.3% by 2021.

This is the statement from RBNZ Governor Adrian Orr:

The Official Cash Rate (OCR) remains at 1.75%. We expect to keep the OCR at this level through 2019 and into 2020.

There are both upside and downside risks to our growth and inflation projections. As always, the timing and direction of any future OCR move remains data dependent.

The pick-up in GDP growth in the June quarter was partly due to temporary factors, and business surveys continue to suggest growth will be soft in the near term. Employment is around its maximum sustainable level. However, core consumer price inflation remains below our 2% target mid-point, necessitating continued supportive monetary policy.

GDP growth is expected to pick up over 2019. Monetary stimulus and population growth underpin household spending and business investment. Government spending on infrastructure and housing also supports domestic demand. The level of the New Zealand dollar exchange rate will support export earnings.

As capacity pressures build, core consumer price inflation is expected to rise to around the mid-point of our target range at 2%.

Downside risks to the growth outlook remain. Weak business sentiment could weigh on growth for longer. Trade tensions remain in some major economies, raising the risk that trade barriers increase and undermine global growth.

Upside risks to the inflation outlook also exist. Higher fuel prices are boosting near-term headline inflation.  We will look through this volatility as appropriate. Our projection assumes firms have limited pass through of higher costs into generalised consumer prices, and that longer-term inflation expectations remain anchored at our target.    

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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