RBNZ Foils Rate-Cut Bets Even as It Pushes Out Forecast for Hike

(Bloomberg) -- New Zealand’s central bank pushed out its forecast for an interest-rate increase to early 2021, disappointing investors looking for signs of a policy easing later this year and sending the currency surging.

Reserve Bank Governor Adrian Orr left the official cash rate at 1.75 percent Wednesday in Wellington and said he expects to keep it there “through 2019 and 2020” as subdued inflation continues to warrant supportive policy. However, the chances of a rate reduction haven’t increased, he said.

“We still see the outlook as balanced” for the OCR, Orr said in a media briefing. “What we are saying is it may stay at this level for longer based on our current projections, in large part because of slowing global economic activity.”

New Zealand’s dollar jumped as much as 1.6 percent, buying 68.48 U.S. cents at 5:20 p.m. in Wellington as traders pared bets on lower rates. There’s now about a 52 percent chance of a rate reduction by November, according to swaps data, down from 90 percent yesterday.

Orr did acknowledge that policy could yet be loosened, saying the next rate move could be up or down -- a return to guidance used for much of last year before an explicit reference to a cut was dropped in November’s statement. Investors had ramped up bets on a quarter-point reduction by the end of 2019 amid signs the economy is losing momentum and after the jobless rate jumped more than expected.

“The RBNZ was either unwilling or unable to meet dovish expectations,” said Andrew Ticehurst, a rate strategist in Sydney at Nomura Holdings Inc. “Although a rate cut was not expected, market participants have observed recent dovish moves by many central banks.”

Globally, policy makers are growing more wary of raising rates amid slower expansion and risks such as the U.S.-China trade dispute and Brexit. The U.S. Federal Reserve has paused its rate increases, while Australia’s Reserve Bank this month abandoned its tightening bias as a slumping property market damped the inflation outlook.

The RBNZ’s projections today show a rate increase is now unlikely before the first quarter of 2021, compared with the third quarter of 2020 previously. The benchmark rate has been at 1.75 percent since November 2016.

“Trading-partner growth is expected to further moderate in 2019 and global commodity prices have already softened, reducing the tailwind that New Zealand economic activity has benefited from,” Orr said. “The risk of a sharper downturn in trading-partner growth has also heightened over recent months.”

Gross domestic product increased just 0.3 percent in the third quarter -- missing the central bank’s expectation.

Orr said he still expects an economic pickup this year as low interest rates and continued employment growth support household spending and business investment.

“The strength, or otherwise, of the economy this year will be pivotal to whether the RBNZ remains on hold or does indeed cut the OCR as market pricing has factored in,” said Nick Tuffley, chief economist at ASB Bank in Auckland.

The RBNZ Wednesday lowered its forecasts for inflation, saying it now expects prices to rise just 1.4 percent in 2019 compared to 1.9 percent previously. Inflation is not expected to reach 2 percent -- the midpoint of the central bank’s target range -- until late 2020.

“There are upside and downside risks to this outlook,” Orr said. “A more pronounced global downturn could weigh on domestic demand, but inflation could rise faster if firms pass on cost increases to prices to a greater extent.”

To contact the reporters on this story: Tracy Withers in Wellington at twithers@bloomberg.net;Matthew Brockett in Wellington at mbrockett1@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Chris Bourke

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