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Reserve Bank keeps rates on hold

NZ Newswire logoNZ Newswire 21/09/2016

The Reserve Bank is keeping the official cash rate on hold at a record low 2 per cent but governor Graeme Wheeler is hinting another cut is in the offing.

The central bank lowered the rate by 25 basis points at its last review in August but opted to stick with the status quo on Thursday despite weak inflation and a strong New Zealand dollar.

The decision, which had been widely expected, came after figures this week showed the economy grew by 3.6 per cent in the year to the end of June and after the US Federal Reserve kept its target interest rate unchanged but signalled a hike later this year.

Mr Wheeler said monetary policy would continue to be accommodative as it strives to keep inflation within its 1-3 per cent target range.

"Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range," he said.

Consumer prices rose an annual 0.4 per cent in the June quarter, the seventh quarter below the Reserve Bank's target.

The kiwi slipped to 73.36 US cents from 73.51 cents before the release, and the trade-weighted index decreased to 77.92 from 78.09.

The TWI has been trading above the bank's August projections as a stronger than expected economy and recovery in dairy prices have added to the international demand for the kiwi which is underpinned by the country's relatively high interest rates.

Mr Wheeler said the high New Zealand dollar was causing concern and said it needed to fall.

"The high exchange rate continues to place pressure on the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector," he said.

He warned rising house prices posed concerns for financial stability and headline inflation remained below the bank's target band although it was expected to rise in the December quarter.

ASB's chief economist Nick Tuffley says the bank's statement accompanying the decision is similar to the tone of last month's monetary policy assessment and contained no surprises.

"The statement was very much in line with what we were expecting to see.," he said.

ASB expects a rate cut to 1.75 per cent in November with chances of a further 25 basis point cut early next year.

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