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RBNZ keeps OCR at 1%, signals future cuts possible

By Rebecca Howard

Sept. 25 (BusinessDesk) - The Reserve Bank of New Zealand kept interest rates on hold at 1 percent as expected and said there is room to cut rates further if necessary. The New Zealand dollar rose.

New information since the August monetary policy statement did not warrant a significant change to the outlook and "there remains scope for more fiscal and monetary stimulus, if necessary, to support the economy and maintain our inflation and employment objectives,” the central bank said. The RBNZ had surprised markets in August when it cut the official cash rate by 50 basis points as most economists had expected a 25 basis point cut.

All 16 economists polled by Bloomberg had expected the rate to remain on hold this week. Market pricing had pointed to about a 25 percent chance of a cut.

The New Zealand dollar lifted after the statement and was trading at 63.45 US cents versus 63.03 US cents just prior to its publication.

According to a summary record of meeting, the bank's monetary policy committee noted that employment remains close to its maximum sustainable level, but consumer price inflation remains below the 2 percent target mid-point.

New Zealand's central bank now has a dual mandate to support maximum sustainable employment and keep annual inflation between 1 percent and 3 percent over the medium term, with a focus on the mid-point. Annual inflation is currently running at 1.7 percent.

The central bank noted that global long-term interest rates remain near historically low levels, consistent with low expected inflation and low growth rates into the future. Consequently, New Zealand interest rates can be expected to be low for longer. Also, the reduction in New Zealand's cash rate has reduced retail lending rates for households and businesses and has reduced the New Zealand dollar exchange rate.

The committee members anticipate a positive impulse to economic activity over the coming year from monetary and fiscal stimulus.

“While GDP growth had slowed over the first half of 2019, impetus to domestic demand is expected to increase,” the committee said.

Household spending and construction activity are supported by low interest rates, while business investment should lift in response to demand pressures.

Overall, the committee expected increasing demand to keep employment near its maximum sustainable level. Rising capacity pressures and increasing import costs, higher wages, and pressure on margins are expected to lift inflation gradually to 2 percent.

However, it also noted several key uncertainties, including global trade and other geopolitical tensions and low business confidence. Also, while fiscal policy is expected to lift domestic demand during the coming year, any increase in government spending could be delayed or it could have a smaller impact on domestic demand than assumed.


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