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New Zealand's central bank governor strikes dovish tone, keeps rates on hold

  • New Zealand's central bank governor struck a dovish tone in his maiden monetary policy statement on Thursday, saying the next move in rates could equally be a cut or a hike, while holding settings at a record low.
  • Investors reacted by pushing the New Zealand dollar to a five-month low of $0.6928, from $0.6990 before the statement. It later recovered a little to $0.6936.
Adrian Orr speaks during a press conference at Parliament on March 26, 2018 in Wellington, New Zealand.
Hagen Hopkins | Getty Images
Adrian Orr speaks during a press conference at Parliament on March 26, 2018 in Wellington, New Zealand.

New Zealand's central bank governor struck a dovish tone in his maiden monetary policy statement on Thursday, saying the next move in rates could equally be a cut or a hike, while holding settings at a record low.

The Reserve Bank of New Zealand's decision to keep settings unchanged was in line with economist expectations, however, Governor Adrian Orr diverged from his recent predecessors by explicitly saying an easing was as likely to be the next move as a tightening.

Orr painted a relatively rosy picture of the New Zealand economy, saying both economic growth and employment remained robust, but acknowledged the stubbornly low inflation he has also inherited.

"I have started in what I would call a sweet spot for any governor to turn up in," Orr told reporters in his first press conference since taking the helm in March.

In the official statement, Orr said rates would remain at 1.75 percent for "a considerable period of time" and the "direction of our next move is equally balanced, up or down. Only time and events will tell."

Investors reacted by pushing the New Zealand dollar to a five-month low of $0.6928, from $0.6990 before the statement. It later recovered a little to $0.6936.

The decision was closely watched as economists and investors looked for clues on how Orr would handle a new policy goal of "maximising sustainable employment" alongside traditional inflation targeting.

Orr said risks "are relatively balanced," citing "perplexing" low wages and employment already at sustainable levels, alongside low inflation. Internationally, he said the risks included faltering growth or further tightening of financial conditions.

"The market has taken it a little bit on the dovish side," said Sharon Zollner, senior economist at ANZ in Auckland.

The new governor put an early stamp on his authority by overhauling the policy statement, which had changed little in several months under his predecessors.

Orr inherited the same tepid inflation that had forced the two previous governors to hold the official cash rate steady since slashing it to its current record low in late 2016.

The bank trimmed its inflation forecasts a little to hit the 2 percent mid-point of its target band by the fourth quarter of 2020, a quarter later than previously predicted.

New Zealand's annual headline inflation slowed to just 1.1 percent in the first quarter, just within the RBNZ's target band, but well below the midpoint of 2 percent.

"It is a concern and that's why we're keeping monetary policy expansionary," Orr said.

Employment target

First-quarter unemployment slid to an eight-year low of 4.4 percent, meaning that Orr could afford to push the bank's new employment goal to the periphery when making interest rate decisions.

Still, Orr said the new employment target was just as important as the inflation target, and noted the central bank believed the economy was "there or thereabouts" in regards to reaching maximum sustainable employment.

Orr later told a Parliament committee that the New Zealand dollar, which has fallen in recent weeks was being "very well behaved" and that its drop on Thursday was a sign that the banks' message that it would keep rates on hold for an extended period was filtering through to markets.

Most economists said despite the change in tone and style, the broader economic outlook from the statement and subsequent press conference were largely in line with Orr's predecessors.

"While subtle, the forward guidance still hints that the next move is up for the cash rate," said Annette Beacher, chief Asia-Pacific strategist at TD Securities.