RBNZ Releases The Doves

By Glenn Dyer | More Articles by Glenn Dyer

The Reserve Bank of NZ has shifted ground in its monetary policy stance dramatically, sending a strong tip that the next move in rates will be down.

The change came in the post-meeting statement issued yesterday afternoon after the bank had held its official cash rate steady on 1.75%.

A slowing world economy and weaker domestic spending saw the Reserve Bank hint that interest rates could be cut, saying emerging conditions meant “the more likely direction of our next OCR move is down”.

“The balance of risks to this outlook has shifted to the downside.

“The risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending. On the upside, inflation could rise faster if firms pass on cost increases to prices to a greater extent.

“We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation,” the RBNZ said in its statement.

The news took markets and economists by surprise – the NZ dollar dropped sharply – losing more than a cent against the US and Australian dollars – as previously the bank has said that the risks were balanced, meaning the next move could be up or down, but its projections suggested interest rate would increase eventually.

That was the basic stance of the Reserve Bank here, although the outlook changed last month to one where a rate cut has become increasingly likely later this year. Only a strong jobs market seems to be keeping the RBA at bay.

Unlike Australia though, the NZ labour market is at full stretch (ours still has a lot of slack) and house prices seem to have turned after two years or more of weakness.

In its monetary policy decision yesterday the RBNZ said:

“Employment is near its maximum sustainable level. However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy.

“The global economic outlook has continued to weaken, in particular amongst some of our key trading partners including Australia, Europe, and China. This weaker outlook has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar.

“Domestic growth slowed in 2018, with softness in the housing market and weak business investment contributing.

“We expect ongoing low-interest rates, and increased government spending and investment, to support economic growth over 2019. Low-interest rates and continued employment growth should support household spending and business investment. Government spending on infrastructure, housing, and transfer payments also supports domestic demand.

“As capacity pressures build, consumer price inflation is expected to rise to around the mid-point of our target range at 2 percent.

Last week 4th quarter GDP figures showed economic growth slowed to a quarter on quarter rate of 0.6% in the final three months of 2018 (stronger than Australia’s 0.2%), with growth for the year slowing to 2.3%, the same annual rate as Australia’s.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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