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OCR remains unchanged at 1.75%

Radio New Zealand logo Radio New Zealand 13/02/2019

© Photo: RNZ / Alexander Robertson The Reserve Bank (RBNZ) has held its cash rate unchanged as expected, but warned there are growing risks to the outlook which may mean rates on hold for longer or even cut.

The official cash rate [OCR] was held at a record low 1.75 percent, where it has been since late 2016.

Governor Adrian Orr said the support for the economy from a strong commodity prices was fading, but there was still a strong labour market and low inflation.

However, he signalled a more downbeat tone by reinstating a phrase about a possible rate cut and longer time frame for any rises.

"We expect to keep the OCR at this level through 2019 and 2020. The direction of our next OCR move could be up or down."

The explicit reference to the chance of a rate cut, which was present through much of last year but dropped in November, was a nod to the softening global outlook.

"There are upside and downside risks to this outlook. A more pronounced global downturn could weigh on domestic demand, but inflation could rise faster if firms pass on cost increases to prices to a greater extent."

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Mr Orr noted inflation remained below the central bank's 2 percent target, which supported "continued supportive monetary policy".

RBNZ forecasts showed it has pushed out its expectation of when it might start raising rates, which is still regarded by economists as the most likely next move.

The central bank had previously signalled a rate rise in mid-to-late 2020, but has pushed that out to the middle of 2021 at the earliest.

Mr Orr said he expected low interest rates, a strong labour market, and government spending on housing and infrastructure to support growth through this year.

An economist said the statement was to be expected given the increased risks and backed the view of interest rates being held low for longer.

"The RBNZ's OCR views are contingent on the economy regaining momentum over 2019. The strength, or otherwise, of the economy this year will be pivotal to whether the RBNZ remain on hold or does indeed cut the OCR ," said ASB's chief economist Nick Tuffley.

The New Zealand dollar rose more than three-quarters of a cent against the US dollar and was stronger against most other major currencies because the statement was not as downbeat and defensive as had been feared.

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