The Reserve Bank's interest-driving offical cash rate (OCR) looks set to be held at the record low 1.75% through to 2020, which was widely expected by analysts yesterday.
The New Zealand dollar rose to US66.68 cents at 9.15am yesterday, against US66.54¢ before Governor Adrian Orr's statement was released. There was only muted US market reaction yesterday after its Federal Reserve announced, as expected, a 0.25% lift in its official cash rate, to 2.25%.
Reserve Bank Governor Orr said he expected to keep the OCR at the same level through 2019 and into 2020, saying only that the direction could be either up or down.
“Employment is around its sustainable level and consumer price inflation remains below the 2% mid-point of our target, necessitating continued supportive monetary policy,” he said.
The Reserve Bank's OCR outlook assumed the pace of growth would pick up over the year ahead, assisting inflation to return to the target mid-point, which is between 1%-3%.
ASB economist Nick Tuffley said the Reserve Bank was “significantly surprised” that the second quarter gross domestic product (GDP) growth came in at 2.8% for the year to June, and the bank's expectations were of a 2.3% rise.
The Reserve Bank had acknowledged it was a stronger starting point, but emphasised the negative risks to the growth outlook remained.
“We continue to expect the Reserve Bank will keep the OCR on hold, and eventually lift it in early 2020,” Tuffley said.
He noted the bank's “modest inflation outlook”' underscored its lack of urgency to adjust policy settings at this point.
Orr said he expected consumer price inflation would gradually rise to the Reserve Bank's 2% mid-point, annual target, as capacity pressures increased.
Westpac chief economist Dominick Stephens said the headline phrases of Orr, relating to the OCR outlook, were very similar to previous statements.
“The Reserve Bank's central expectation is that the OCR will remain unchanged for a long while, but the balance of risks is to the downside (negative),” Stephens said.
*Simon Hartley is senior business reporter and assistant chief reporter for the Otago Daily Times.