RBNZ's Orr Keeps Rate at Record Low, Leaves Door Open to Cut

(Bloomberg) -- New Zealand’s central bank held interest rates at a record low and left the door open to a cut as inflation remains subdued.

Reserve Bank Governor Adrian Orr on Thursday kept the official cash rate at 1.75 percent and said it would remain there “for some time to come.” The RBNZ pushed out its forecast for the first OCR increase to the third quarter of 2019 from the second.

“The direction of our next move is equally balanced, up or down,” Orr said in a statement in Wellington. “Only time and events will tell.”

The central bank’s benchmark has been at an historic low since late 2016 as New Zealand’s strong exchange rate and weak global inflation exert downward pressure on prices. Orr took charge of the RBNZ just six weeks ago and today’s is the first rate decision made under a broadened mandate of supporting maximum sustainable employment as well as achieving price stability.

The kiwi dollar fell more than half a U.S. cent after the statement, trading at 69.23 cents at 1:54 p.m. in Wellington from 69.83 cents beforehand.

Despite some communication improvements in the statement, “the actual substance of the OCR outlook has not materially changed,” said Dominick Stephens, chief economist for New Zealand at Westpac Banking Corp. “However, there is now a labor market element to the RBNZ’s reasoning.”

Orr, who changed the wording of the rate decision and some presentation elements of the monetary policy statement, said he wants the bank to communicate more clearly to a wider audience, in a media briefing after the decision.

Mum on Kiwi

The governor made no comment about the exchange rate in his statement. Grant Spencer, who was acting governor before he handed the reins to Orr, said the RBNZ should refrain from commenting on the currency unless it’s out of line with fundamentals.

Orr said inflation remains below the 2 percent midpoint of the bank’s 1-3 percent target band due in part to low import prices and subdued wage pressures. While emerging capacity constraints are projected to push inflation gradually toward 2 percent, the RBNZ pushed back its forecast for the goal to be reached to the fourth quarter of 2020 from the third.

“To best ensure this outcome, we expect to keep the OCR at this expansionary level for a considerable period of time,” Orr said. “This is the best contribution we can make, at this moment, to maximizing sustainable employment and maintaining low and stable inflation.”

Speaking later in the day to a parliamentary committee, Orr said rates need to be expansionary to lift inflation.

What Our Economists Say

“The central bank put greater emphasis on the message that the next move in the policy rate could be up or down -- even though its forecasts for 2019 still suggest a bias for an increase in the official cash rate. This divergence suggests the official cash rate forecasts may be less useful as a signaling tool. Bloomberg Economics still thinks a rate hike in 2019 will not happen. A rate cut seems more likely, using the RBNZ’s projections for a sharp slowdown in consumption into 2020.”

-- Tamara Henderson, Bloomberg Economics

Gross domestic product probably rose 0.7 percent in the first quarter of 2018, less than the 0.8 percent forecast in February, the RBNZ said today. Annual growth will accelerate to 3.3 percent in the first quarter of 2019 from 2.9 percent currently.

“Economic growth and employment in New Zealand remain robust, near their sustainable levels,” Orr said. “Ahead, global economic growth is forecast to continue supporting demand for New Zealand’s products and services.”

©2018 Bloomberg L.P.

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