RBNZ's Orr keeps OCR at 1.75%; more upbeat about economic growth

Thursday 27th September 2018

Reserve Bank governor Adrian Orr left the official cash rate at a record low 1.75 percent and while he kept a future cut on the table, he was more upbeat about the economy.

"We expect to keep the official cash rate at this level through 2019 and into 2020. The direction of our next OCR move could be up or down," Orr said in a one-page statement.

The wording was virtually identical to the prior statement in August although he was more optimistic about economic growth.

"Our outlook for the OCR assumes the pace of growth will pick up over the coming year, assisting inflation to return to the target mid-point," he said. "Domestically, ongoing spending and investment, by both households and government, is expected to support growth."

The New Zealand dollar rose to 66.68 US cents at 9.15am versus 66.54 cents prior to the statement.

Orr noted economic growth was stronger than expected in the June quarter but said downside risks to the growth outlook remain. Government data show gross domestic product expanded 1 percent in the three months to June 30, outstripping both the market and the central bank's expectations.

In August, the central bank's forecasts showed a full rate hike was signalled by December 2020, when the benchmark rate is forecast to be 2 percent.

The Reserve Bank is charged with keeping annual inflation between 1 percent and 3 percent with a focus on the mid-point and with supporting maximum levels of sustainable employment within the economy.

While employment is "around its sustainable level," consumer price inflation remains below the 2 percent mid-point of the target "necessitating continued supportive monetary policy," said Orr.

The central bank governor said there were signs core inflation was moving back towards the mid-point target.

"Higher fuel prices are likely to boost inflation in the near term, but we will look through this volatility as appropriate. Consumer price inflation is expected to gradually rise to our 2 percent annual target as capacity pressures bite," he said.

The consumers price index rose 0.4 percent in the three months ended June 30, while annual inflation was 1.5 percent. However, there were emerging signs of wage inflation in recent labour data as the impact of a lift in the minimum wage kicks in and migration continues to slow.

All 19 economists polled by Bloomberg expected the official cash rate to remain on hold at 1.75 percent.

(BusinessDesk)

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