RBNZ delays rate hike for another year

The Reserve Bank's latest forecast for the Official Cash Rate extends flat rates until well into 2020. Previously it forecast hikes from mid-2019. Photo: RBNZ chart.

The Reserve Bank has just extended the low interest rate track for another year until well into 2020.

The Reserve Bank held the Official Cash Rate at 1.75 percent this morning, but issued a more dovish than expected outlook by forecasting it will hold the rate steady until well into 2020. Previously it forecast the first move up in mid to late 2019.

"We expect to keep the OCR at this level through 2019 and into 2020, longer than we projected in our May Statement," Governor Adrian Orr said in the opening statement issued with the full Monetary Policy Statement, which included the first set of public forecasts since the bank's May MPS.

"The direction of our next OCR move could be up or down," he said.

This is an unchanged neutral stance from the bank's last interest rate decision six weeks ago.

"While recent economic growth has moderated, we expect it to pick up pace over the rest of this year and be maintained through 2019," Orr said.

"Robust global growth and a lower New Zealand dollar exchange rate will support export earnings. At home, capacity and labour constraints promote business investment, supported by low interest rates. Government spending and investment is also set to rise, while residential construction and household spending remain solid," he said.

"The labour market has tightened over the past year and employment is roughly around its maximum sustainable level. We expect the unemployment rate to decline modestly from its current level. There are welcome early signs of core inflation rising. Inflation will increase towards two percent over the projection period as capacity pressures bite. This path may be bumpy however, with one-off price changes from global oil prices, a lower exchange rate, and announced petrol excise tax rises expected.

"We will look through this volatility as appropriate, and only respond to any persistent movements in inflation.

"Risks remain to our central forecast. The recent moderation in growth could last longer. Low business confidence can affect employment and investment decisions. Conversely, there is a chance that inflation could increase faster if cost pressures can pass through into higher prices and impact inflation expectations.

"We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation."

We will be attending the 10 am news conference and report on the MPS in more detail after the news conference. Look on Newsroom Pro for those reports.