By Jenny Ruth
Feb. 13 (BusinessDesk) - Reserve Bank governor Adrian Orr has held his official cash rate steady, as expected, and essentially repeated the language from his last review in November, saying he expects to hold it where it is through 2019 and 2020 and that the next move could be either up or down.
The OCR currently sits at its record low of 1.75 percent where it has been since November 2016.
“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,” Orr says in a statement.
Changes to the central bank’s forecasts in the latest monetary policy statement show the first move to the OCR is not anticipated until the first half of 2021, and that move will be up.
In November, the Reserve Bank was forecasting an OCR hike some time in the September and December quarters of 2020.
The New Zealand dollar had been weakening going into the statement’s release and was at 67.35 US cents immediately beforehand. It shot as high as 68.27 US cents immediately after the release and had eased to 68.13 after about 20 minutes.
“There are upside and downside risks to this outlook,” Orr says.
Employment is near its maximum sustainable level but core inflation remains below the 2 percent midpoint of the Reserve Bank’s inflation target, “necessitating continued supportive monetary policy,” he says.
Trading partner growth is expected to moderate further through this year and global commodity prices have already softened, “reducing the tailwind that New Zealand economic activity has benefitted from. The risk of a sharper downturn in trading-partner growth has also heightened over recent months,” he says.
Despite that, Orr says he expects low interest rates and government spending will support a pick-up in New Zealand’s GDP growth during 2019.
“Low interest rates, and continued employment growth, should support household spending and business investment. Government spending on infrastructure and housing also supports domestic demand,” Orr says.
“As capacity pressures build, consumer price inflation is expected to rise to around the mid-point of our target range at 2 percent.”
The central bank’s forecasts show that happening by December 2020, rising to 2.1 percent in March 2021 through to the September quarter of 2021 before easing again to 2 percent in December 2021. It is forecast to go back to 2.1 percent in the March quarter of 2022.
In November, the Reserve Bank forecast annual inflation would hit 2 percent by the June quarter of 2020, two quarters earlier than now.
“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,” Orr says.
The Reserve Bank has lowered both its quarterly GDP and inflation forecasts a notch or two through to the March quarter of 2021.