Reserve Bank keeps NZ official cash rate at 1.5 per cent

Reserve Bank Governor Adrian Orr. Photo/NZ Herald.

The Reserve Bank has kept its official cash rate at 1.5 per cent, in line with market expectations, but has strongly hinted that a cut may be in the pipeline.

"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 bank said in a statement.

The bank cut the rate to its current record low on May 8 and some economists predict another cut could take place in August.

The central bank said domestic growth has slowed over the past year, although it noted that construction activity strengthened in the March 2019 quarter.

Softer house prices and subdued business sentiment continue to dampen domestic spending, it said.

The global economic outlook had weakened, and downside risks related to trade activity had intensified, it said.

A number of central banks are easing their monetary policy settings to support demand.

"The weaker global economy is affecting New Zealand through a range of trade, financial, and confidence channels," the Reserve Bank said.

It expects low interest rates and increased government spending to support a lift in economic growth and employment.

Inflation is expected to rise to the 2 per cent midpoint of the bank's target range, and for employment to remain near its maximum sustainable level.

"Given the downside risks around the employment and inflation outlook, a lower OCR may be needed," it said.

The decision to leave the rate unchanged came as no surprise.

"However, the policy assessment confirmed that an easing bias was in place noting a 'lower OCR may be needed over time to continue to meet our objectives'," ASB economists said in a commentary.

Some banks, including ASB, are predicting a rate cut in August.

"Future moves in the OCR are likely to remain data dependent and will also be contingent on global events, the actions of overseas central banks and the NZD," ASB said.

The New Zealand dollar dipped by about 20 basis points in the minutes following the 2pm release but soon bounced back. By 2.15pm the kiwi dollar was at US66.47c, up from US66.4 just before the release.