Reserve Bank keeps official cash rate on hold at 0.25%

Reserve Bank Governor Adrian Orr. Photo / File

The Reserve Bank has kept its official cash rate on hold at 0.25 per cent, in line with market expectations, but said the stronger New Zealand dollar had put pressure on export earnings.

The central bank, in an emergency response to the Covid-19 pandemic, cut its rate by three quarters of a percentage point to 0.25 per cent on March 16 - its lowest ever level.

Economists expect the rate to stay there for at least the course of this year.

The bank has said it expects the decline in annual GDP this year to be the largest in at least 160 years, yet the New Zealand dollar, after slumping to US57c on March 20, has rallied strongly, trading today at US65c.

In its statement the bank said the stronger New Zealand dollar had "put further pressure on export earnings".

The Reserve Bank's Monetary Policy Committee agreed to continue with its $60 billion Government bond buying programme - which is aimed at keeping interest rates low.

The committee said it was committed to reviewing the size of the programme at regular intervals.

"New Zealand has contained the spread of Covid-19 locally for now, enabling a relaxation of social restrictions and an earlier resumption of domestic economic activity than assumed in our May Monetary Policy Statement," the bank said.

"The Government's intended fiscal stimulus, announced in its May Budget, was also slightly larger than we assumed. These outcomes give cause for some confidence but significant economic challenges remain," it said.

The severe global economic disruption caused by the Covid-19 pandemic was persisting, leading to lower economic activity, employment, and inflation abroad and in New Zealand.

"The negative economic impact on New Zealand is exacerbated by the required international border restrictions, as the vast majority of the world battles to contain the pandemic," it said.

Support for the economy was appropriately being provided through increased fiscal spending.

"However, monetary policy will continue to provide significant support," it said.

The New Zealand dollar dropped by about 22 basis points to US64.77c in the 15 minutes following the statement's 2pm release.

The statement was in line with expectations, highlighting as it did the uncertain outlook.

"The Reserve Bank sounded fairly balanced when it left policy settings unchanged today, but we still think the Bank will cut rates into negative territory next year," Capital Economics said in a commentary.