(Bloomberg) -- New Zealand’s central bank kept interest rates unchanged but said there is scope to reduce them further if necessary amid slowing economic growth and subdued inflation.
“The Monetary Policy Committee agreed that new information since the August Monetary Policy Statement did not warrant a significant change to the monetary policy outlook,” the Reserve Bank said in a statement Wednesday in Wellington after leaving the official cash rate at a record-low 1%. However, “there remains scope for more fiscal and monetary stimulus, if necessary, to support the economy and maintain our inflation and employment objectives,” it said.
The RBNZ has cut borrowing costs by 75 basis points this year --including a surprise 50-point cut in August -- and Governor Adrian Orr has said the central bank would watch, wait and observe the response of the domestic economy. With consumer and business confidence still sluggish and inflation expectations subdued, traders are betting the central bank will be prompted to cut again at the next review in November, when it will have fresh economic forecasts.
“Even though the OCR remained steady at this meeting, a lower OCR remains very much on the cards,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “But by itself the statement suggests that a November cut isn’t a dead certainty, even though we think it is the highly likely outcome.”
The kiwi dollar rose after the statement. It bought 63.41 U.S. cents at 2:18 p.m. in Wellington from 63.12 cents immediately before the release. There is about a 76% chance of a quarter-point reduction in November, swaps data show, down from 90% this morning.
Global Tensions
All 21 economists surveyed by Bloomberg expected today’s decision to hold rates and most forecast one more cut this year as the weakest business confidence in a decade and the trade war between the U.S. and China continue to cloud the near-term outlook.
Global trade and other political tensions remain elevated and continue to subdue the global growth outlook, dampening demand for New Zealand’s goods and services, the RBNZ said.
At the same time, the domestic economy has cooled, with annual growth slowing to 2% in the second quarter -- the slowest since late 2013.
“The committee noted that, while GDP growth had slowed over the first half of 2019, impetus to domestic demand is expected to increase,” the bank said in a record of meeting published with today’s decision. Increasing demand would keep employment near its maximum sustainable level, while rising capacity pressures and increasing import costs, higher wages, and pressure on margins “are expected to lift inflation gradually to 2%,” it said.
Annual inflation picked up to 1.7% in the second quarter but it remains below the midpoint of the RBNZ’s 1-3% target range and is tipped by economists to slow in the second half of 2019.
“Keeping the OCR at low levels is needed to ensure inflation increases to the mid-point of the target range, and employment remains around its maximum sustainable level,” the RBNZ said. “Global long-term interest rates remain near historically low levels, consistent with low expected inflation and growth rates into the future. Consequently, New Zealand interest rates can be expected to be low for longer.”
(Updates with economist’s comment in fourth paragraph.)
