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RBNZ keeps OCR at 1% but November cut may be off the cards

Wednesday 25th September 2019

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The Reserve Bank of New Zealand kept interest rates on hold at 1 percent as expected and the Kiwi dollar rose as a November rate cut - while possible - may not be a done deal.

"By itself the statement suggests that a November cut isn’t a dead certainty, even though we think it is the highly likely outcome," said ASB chief economist Nick Tuffley.

"The press release suggested that the RBNZ does not currently see a need to cut the official cash rate further," said Westpac Bank chief economist Dominick Stephens. "The RBNZ seems to be saying that all its actions to date are sufficient." 

According to the central bank, 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 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. 

ANZ Bank chief economist Sharon Zollner said "the door was left open to further cuts but not opened further." 

The New Zealand dollar was trading at 63.35 US cents at 3.30pm, up from 63.03 cents just prior to the release of the decision at 2pm. The odds of a November rate cut fell to 76 percent from 92 percent prior to the release. 

Westpac, however, is expecting data to remain weak and continues to forecast a cut in November even though "the RBNZ today did not sound like a central bank that is planning on doing that," said Stephens. 

Tuffley said he still thinks a lower cash rate is "very much on the cards" and is still expecting a 25 basis point cut in November and said the risk is there is more easing next year. 

Ben Udy, Australia and New Zealand economist at Capital Economics, said the central bank sounded more comfortable with its position but he still thinks it will cut to 0.75 percent early next year. 

Zollner is still forecasting three more cuts in November, February and May, taking the cash rate to 0.25 percent. 

While the monetary policy committee did leave the door open for more easing, it was also fairly upbeat looking forward. 

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.

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


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