On Hold RBNZ Surprises Markets

By Glenn Dyer | More Articles by Glenn Dyer

Oops, got that one very wrong. Most NZ economists had tipped the Reserve Bank of NZ to cut its key official cash rate by 0.25% but the central bank sat pat yesterday and followed its Trans-Tasman counterpart and sat on its hands.

All the major banks (all of which are Australian-owned by the way) had forecast a 25 basis-point cut, with Westpac only matching that forecast on Tuesday after the Reserve Bank said there had been a weakening in inflationary expectations among businesses.

But the RBNZ’s Monetary Policy Committee left the Official Cash Rate (OCR) at 1.0%, although there was extensive discussion of another cut, according to the minutes of the meeting released with the decision statement.

The news saw the NZ dollar rise by nearly one cent against the greenback to be over 64 US cents.

There had been debate on the committee about a cut to 0.75% and the impact that would have not only on the economy but savers and others. The committee decided to leave the OCR unchanged.

The Reserve Bank said that while inflation remained below the 2% target mid-point, economic developments since August did not warrant a change to “the already stimulatory monetary setting at this time”.

Like the RBA the RBNZ made it clear it remained “prepared to act as required.”

In the post-meeting statement, the central bank noted that employment remained around its maximum sustainable level.

“Economic growth continued to slow in mid-2019 reflecting weak business investment and soft household spending. We expect economic growth to remain subdued over the remainder of the calendar year. We will continue to monitor economic developments and remain prepared to act as required,“ the statement said.

“Trading-partner growth has also slowed. Growth in global trade and manufacturing is weak and uncertainty remains high, dampening global business investment. However, New Zealand’s export commodity prices have been robust, underpinning a positive terms of trade. The lower New Zealand dollar exchange rate this year is also providing a useful additional offset to the weaker global economic environment.

“Domestic economic activity is expected to increase during 2020 supported by low interest rates, higher wage growth, and increased government spending and investment. The low level of the OCR has flowed through to lower lending rates more generally, which support spending and investment. Rising capacity pressures are projected to promote a pick-up in business investment.

“Interest rates will need to remain at low levels for a prolonged period to ensure inflation reaches the mid-point of our target range and employment remains around its maximum sustainable level. We are committed to achieving our inflation and employment objectives. We will add further monetary stimulus if needed,“ the statement ended.

The RBNZ also released its last monetary policy statement for the year and revealed (like the RBA did last week) a downgrading in its forecasts with GDP now expected to be up 2% in 2019.

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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