Reserve Bank governor Grant Spencer has warned against over playing forecast hikes to interest rates, saying the next move could still be down.

The Reserve Bank left rates on hold at 1.75 per cent today, however, it did move its forecast for hikes to June 2019 from September 2019.

It was a subtle shift but the first directional signal we've seen from the Reserve Bank in some time.

But Spencer described it as a marginal move in the context of many moving parts.


"In fact we are still retaining a neutral bias in policy. Even though that track moves up a bit we could just as well see the next policy move down as up," he said.

"There is so much risk on the down side as well as up - particularly around inflation pressure."

It would also be wrong to view the shift in rate track solely as a reaction to the prospect of more Government spending, Spencer said.

While there were signs that some government policies could add to inflation there were opposing pressures, such as reduced immigration and curbs on the housing market, which could see a slowdown in private spending.

In fact the expected slowdown in private spending was likely regardless of which party won the election, he said.

"The net is a slightly high interest rate track but we shouldn't overemphasise that because it is pretty marginal in the context of a lot of moving parts."

NZIER principal economist Christina Leung agreed that it was prudent to retain a neutral view on interest rates given the economy was likely to face changes on both the supply and demand side.

Reduced immigration and reduced consumer spending on lower house prices could put downside pressure on the economy, at the same time as a bigger spending Government created more upside pressure, she said.

"There is a large degree of uncertainty around what the new policies will mean," she said.

All around the world the jury was still out on whether inflation was going to return to normal as economic activity picked up or remain subdued under pressure from new technology and globalisation trends, Spencer said.

So the Reserve Bank was considering both domestic and global uncertainties.
Risks also remained around the housing market and while the Bank was expecting a period of more stable price movement there was still a supply shortage which had to be worked through.

The dollar rose on the release of the Monetary Policy Statement - Spencer's first in the role of acting governor until March next year.

Currency markets had been buoyed by the absence of any comments from the governor about the Kiwi dollar being over valued, NZIER's Leung said.

Spencer confirmed the Reserve Bank was more comfortable with the dollar below US70c and considers that closer to "fair value".

Although he noted that "fair value" was a relative term and could change depending on the broader state of the New Zealand economy.

Spencer addressed the new Government's review of the Reserve Bank Act saying he was comfortable with the terms of reference, although he noted that the proposed changes would make little or no difference to decision making in the current economic climate.

"Moving to a dual mandate is unlikely to have [an] impact on the way we run monetary policy," Spencer said.

Currently inflation was the Bank's primary objective but was not the sole objective, he said.

"We're not strict inflation targeters, we're flexible inflation targeters," he said. "Which means we do look broadly and try to make sure we're stabilising output, employment and the exchange rate even though inflation might be going outside the band."

A dual mandate might mean the approach became even more flexible in allowing greater volatility in inflation to promote more stability in employment, he acknowledged.

"But in the current situation, given that the labour market is pretty balanced its unlikely that you'd be doing anything much different than what you would right now."

Leung said the changes proposed in the review looked more like "tinkering" than major reform.