(Bloomberg) -- New Zealand’s central bank said there was scope to ease policy further if necessary amid slowing economic growth and subdued inflation, after it kept the official cash rate on hold Wednesday.
The Monetary Policy Committee agreed that new information since the August decision “did not warrant a significant change to the monetary policy outlook,” the Reserve Bank said in a statement in Wellington after leaving the OCR at a record-low 1%. However, “there remains scope for more fiscal and monetary stimulus, if necessary, to support the economy and maintain our inflation and employment objectives,” it said.
The RBNZ has cut borrowing costs by 75 basis points this year --including a surprise 50-point cut in August -- and Governor Adrian Orr has said the central bank would watch, wait and observe the response of the domestic economy. With consumer and business confidence still sluggish and inflation expectations subdued, traders are betting the central bank will be prompted to cut again at the next review in November, when it will have fresh economic forecasts.
“Even though the OCR remained steady at this meeting, a lower OCR remains very much on the cards,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “But by itself the statement suggests that a November cut isn’t a dead certainty, even though we think it is the highly likely outcome.”
The kiwi dollar rose after the statement, which was less dovish than some economists and traders expected. It bought 63.45 U.S. cents at 3:19 p.m. in Wellington from 63.12 cents immediately before the release.
The currency has dropped 1.8% since the Aug. 7 rate cut and the committee said it was “pleased” to see that depreciation, as well as a recent decline in retail lending rates.
All 21 economists surveyed by Bloomberg expected today’s decision. Most forecast one more cut this year as the weakest business confidence in a decade and the trade war between the U.S. and China continue to cloud the near-term outlook. Swaps data show about a 78% chance of a quarter-point reduction in November, down from 90% before Wednesday’s decision.
What Bloomberg’s Economists Say
“More easing may be in the pipeline this year, in our view, if recent softness in the New Zealand dollar against trading partners unwinds.”
-- Tamara Mast Henderson, Economist
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The RBNZ’s reference to fiscal stimulus echoes comments Orr made in August, when he said monetary policy needs friends. Finance Minister Grant Robertson told the Bloomberg Address on Sept. 3 he expects the economy will respond to the spending he has already announced, although he is “prepared to move” if needed.
Global trade and other political tensions continue to subdue the global growth outlook, dampening demand for New Zealand’s goods and services, the RBNZ said today. At the same time, the domestic economy has cooled, with annual growth slowing to 2% in the second quarter -- the slowest since late 2013.
While GDP growth had slowed over the first half of 2019, “impetus to domestic demand is expected to increase,” the bank said in a separate record of meeting.
Annual inflation picked up to 1.7% in the second quarter but it remains below the midpoint of the RBNZ’s 1-3% target range and is tipped by economists to slow in the second half of 2019.
“Keeping the OCR at low levels is needed to ensure inflation increases to the mid-point of the target range,” the RBNZ said. “Global long-term interest rates remain near historically low levels, consistent with low expected inflation and growth rates into the future. Consequently, New Zealand interest rates can be expected to be low for longer.”
(Updates with comment on currency in sixth paragraph.)