The Official Cash Rate (OCR) has remained unchanged at 1.75%, with the Reserve Bank stating that it expects to keep the OCR at this level throughout 2019 and into 2020 – longer than predicted in its May statement. The Reserve Bank says the direction of its next OCR change could go up or down.
Economic growth is expected to pick up over the rest of 2018 and be maintained over 2019, with strong global growth and a lower New Zealand dollar exchange rate supporting earnings. Reserve Bank governor Adrian Orr also expects New Zealand’s capacity and labour constraints to lead to more business investment, which will be supported by low interest rates.
There is a chance of the current low business confidence affecting business and investment decisions, however inflation may also show a faster increase is cost pressures translate into higher prices.
Government spending and investment is also set to rise, with residential construction and household spending remaining solid. On inflation, Orr says there are some welcome early signs of core inflation rising, but market volatility will likely mean a lack of stability.
“Inflation will increase towards 2% over the projection period as capacity pressures bite,” Orr stated. “This path may be bumpy however, with one-off price changes from global oil prices, a lower exchange rate and announce petrol excise taxes expected. We will look though this volatility as appropriate, and only respond to any persistent movements in inflation.”
“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.”
OCR likely to remain unchanged until next year
Bank expects "neutral assessment" of Official Cash Rate