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OCR kept low, 2019 rise flagged

NZ Newswire logoNZ Newswire 8/02/2017 Paul McBeth

Reserve Bank governor Graeme Wheeler has kept the official cash rate at 1.75 per cent and acknowledged growing expectations for a rate hike, signalling it could come in 2019.

"Monetary policy will remain accommodative for a considerable period," Mr Wheeler said on Thursday morning.

"Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."

Three months ago the Reserve Bank cut the benchmark rate to a record low and signalled the OCR was set to stay on hold until the end of 2019.

Since then, the US Federal Reserve has projected a more aggressive round of rate hikes might be needed in the world's biggest economy where robust growth will be stimulated by an expansionary infrastructure programme from President Donald Trump. That's lifted bond yields around the world and prompted some investors to start pricing in rate hikes in New Zealand as early as this year.

The Reserve Bank now sees the OCR at 1.8 per cent until June 2019, rising to 2 per cent by March 2020.

The kiwi dollar fell to US72.61 cents from US73.02c immediately before the release, and the trade-weighted index dropped to 79.03 from 79.49.

Mr Wheeler said a decline in the exchange rate was needed with the currency "higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector".

The persistently strong currency has been a thorn in his side by making imported goods cheaper and restraining the bank's mandated inflation measure, the consumers price index, which returned to the target band of 1-to-3 per cent in the December quarter.

Mr Wheeler said inflation returned to the target band as last year's slump in global oil prices dropped out of the index's calculation, and that he expects CPI to "gradually" return to the 2 per cent mid-point of the target band "reflecting the strength of the domestic economy and despite persistent negative tradables inflation".

Mr Wheeler said the economy "increased as expected and is steadily drawing on spare resources", with an expanding population, low interest rates, and construction activity driving a positive outlook".

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