The Official Cash Rate (OCR) has remained unchanged at 1.75%, though the Reserve Bank of New Zealand (RBNZ) has adjusted its neutral stance and stated that the most likely direction of its next OCR move is down.
RBNZ cited risks of “a more pronounced global downturn” affecting key trading partners in Australia, Europe and China, which has prompted central banks to ease expected monetary policy stances. Domestic growth also slowed in 2018, largely due to a “soft” housing market and weak business investment.
RBNZ expects ongoing low interest rates and increased government spending and investment to support economic growth in 2019, and continued employment growth to support household spending and business investment. The property market should also receive a boost from government spending on infrastructure and housing.
“The balance of risks to this outlook has shifted to the downside,” the Reserve Bank said in a statement. “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.”
Following the announcement, ASB adjusted its outlook for the OCR and now expects 25bp in OCR cuts in August and November of this year.
“The RBNZ has made a clear shift, dropping its neutral bias and intent to keep the OCR on hold until 2021, and instead flagging the more likely direction for the next OCR move to be down,” ASB chief economist Nick Tuffley said.
“In the near term the risk of an OCR cut will remain high. Every OCR announcement is now potentially ‘live’.”
Tuffley says a key point of uncertainty is whether 2019 growth will recover from a “patchy” 2018, as the Reserve Bank had been surprised at the weakness of New Zealand’s growth at several points over the last year.
“Upcoming business confidence surveys will be very important between now and the May Monetary Policy Statement in shaping views of how robust or otherwise the domestic economy is,” Tuffley said. “And further deterioration in the global outlook is another potential trigger.”
“The OCR isn’t going up for a considerable time,” he concluded. “The risk is clear and present - and down.”