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RBNZ says next move is likely a rate cut, kiwi dollar falls

Wednesday 27th March 2019

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The Reserve Bank of New Zealand kept the official cash rate on hold at 1.75 percent but changed its language to say it now expects to cut rates. The kiwi dollar tumbled more than 1 US cent. 

"Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down," said central bank governor Adrian Orr in the short statement accompanying the decision.

The dollar fell to 68.06 US cents at 2:10pm from 69.09 cents just prior to the statement because the change in language was a marked move away from a neutral position. In prior statements, Orr had said the direction could be up or down. 

Orr said the global economic outlook has continued to weaken which has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar. He also noted that domestic growth slowed in 2018, with softness in the housing market and weak business investment contributing.

He did note, however, that the central bank expects ongoing low interest rates, and increased government spending and investment, to support economic growth over 2019.

Against that backdrop, "consumer price inflation is expected to rise to around the mid-point of our target range at 2 percent," he said. 

However, "the balance of risks to this outlook has shifted to the downside," he said. The risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending. On the upside, inflation could rise faster if firms pass on cost increases to prices to a greater extent.

While the language around a possible cut was more dovish, some was identical to the prior statement in February. 

"Employment is near its maximum sustainable level. However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy," he reiterated. 

"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," he said.

While today's statement did not include a full set of forecasts, published with the Monetary Policy Statement, Orr will deliver a speech on Friday about how monetary policy decisions are made in New Zealand, including greater transparency and accountability.

(BusinessDesk)



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