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RBNZ to keep rates on hold, reiterate next move could be up or down

Monday 24th September 2018

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The Reserve Bank is expected to keep rates on hold Thursday and reiterate that cut are still on the table despite recent strong economic data.

All 19 economists polled by Bloomberg expect the official cash rate to remain on hold at a record low 1.75 percent. Only three of 11 expect rates to lift to 2 percent by the third quarter of 2019. The remainder see them on hold. 

At the August rate review, the central bank kept the OCR at 1.75 percent and pushed out the timing of the first rate hike, citing weak growth as a concern. Governor Adrian Orr reiterated that “the direction of our next OCR move could be up or down.”

As a result, the market immediately pared back expectations of a rate cut when the economy grew 1.0 percent during the June quarter, versus the central bank's forecast for 0.5 percent growth. Economists, however, say it could still happen. 

"The RBNZ is probably still in wait and see mode, wary of the possibility that inflation and the labour market are not yet strong enough. Any false step from the data could still be met by an RBNZ OCR cut over the coming year," said Westpac Bank chief economist Dominick Stephens. 

He also thought it "very unlikely that the RBNZ will issue a hawkish statement that causes interest rates and the exchange rate to rise." 

ANZ chief economist Sharon Zollner also doesn't expect strong language from the bank while it remains in "data‑watching mode".

"We expect that they will want to keep things simple – retaining a consistent message and keeping their options open until they have a clearer sense regarding the degree of economic momentum into the end of the year.". 

She expects the central bank to continue to state that the next move in the OCR could be “up or down”. While inflation looks set to increase in the near-term, the central bank will remain focused on underlying demand and the degree to which inflation is expected to persist over the medium term. 

"All up, we continue to view a cut in the OCR as more likely than a hike," she said. 

ASB senior economist Mark Smith said "the RBNZ is expected to stick to the script, signal the OCR is expected to remain on hold for a considerable period, but reaffirm that the next move could be either up or down.

While the "economy has a considerably stronger starting point for economic activity than the RBNZ had assumed, the downward risk profile will likely prompt a guarded policy assessment, with the RBNZ continuing to dangle the carrot of a lower OCR to keep monetary conditions accommodative," he added. 

Capital Economics senior Australia & New Zealand economist Marcel Thieliant expects the central bank will acknowledge that second-quarter GDP growth was stronger than it had anticipated.

"But we still think that economic activity will fall short of the bank’s projections."

Capital Economics' forecasts for 2020 are markedly lower than that of the Reserve Bank and it doesn't expect any rate increases until late 2021. 

(BusinessDesk)

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