RBNZ keeps rate on hold, adopts slight 'dovish' tone

Reserve Bank Governor Adrian Orr. Picture/NZ Herald.

The Reserve Bank has kept its official cash rate at 1.75 per cent, which was in line with market expectations, but the bank's comments are being viewed as slightly more "dovish" than its previous stance.

In a statement, Reserve Bank Governor Adrian Orr said the bank was well-positioned to manage change in either direction – up or down – as necessary.

He said the outlook for the New Zealand economy, as detailed in the bank's May monetary policy statement, remained intact.

"Employment is around its sustainable level and consumer price inflation remains below the 2 percent mid-point of our target, necessitating continued supportive monetary policy for some time to come," he said.

Global economic growth was expected to support demand for New Zealand's products and services.

"Global inflationary pressure is also expected to be higher but remain modest. This outlook has been tempered slightly by trade tensions in some major economies," he said.
The bank noted ongoing volatility in some emerging market economies.

"Domestically, ongoing spending and investment, by both households and government, is expected to support growth. However, the recent weaker GDP outturn implies marginally more spare capacity in the economy than we anticipated," Orr said.

"The Government's projected spending impulse is also slightly lower and later than anticipated," he said.

CPI inflation was likely to increase in the near term due to higher fuel prices. Beyond that, inflation was expected to gradually rise to within the bank's desired 2 per cent annual target, resulting from capacity pressures, Orr said.

ANZ senior macro strategist Phil Borkin said he viewed the statement as being "marginally more dovish" than the previous one in May.

"The Reserve Bank is acknowledging a few more risks, globally, the deterioration of the domestic growth picture at the margin, and a bit more spare capacity," Borkin said.

Borkin said it looked as if the bank was showing a greater preparedness to act if conditions deteriorate.

He said a rate cut at some point could not be ruled out if the economy deteriorates to a meaningful extent. "But we are not at that point today."

ASB economists said the message from the central bank was that it was "comfortably on hold" but that the risks have been shifting to a later start to the tightening cycle.

ASB now expects the tightening cycle to start in November 2019 from its previous forecast of a hike in August that year. "We also see growing risk that the next move may be a cut, rather than a hike."

The Reserve Bank said the best contribution it can make to maximising sustainable employment, and maintaining low and stable inflation, was to ensure the OCR is at an expansionary level "for a considerable period".

The central bank's statement follows ANZ's business confidence survey for June, which suggested a further slowdown in the economy was in store.

At its current level, the rate is at its lowest point since official cash rates were introduced in 1999. The bank last adjusted its rate - a cut of 25 basis points - in November 2016.

The New Zealand dollar rose to US68.07c just after the release from US67.96c a few minutes before.

The currency had earlier fallen sharply to 67.91 from 68.5 on Wednesday. ANZ's Borkin said movement in the currency was not related to the Reserve Bank's statement, and suggested the market was "short" kiwi after the big fall overnight.

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