New Zealand's central bank kept interest rates steady on Thursday and warned of rising risks to the outlook as growth slows and global trade frictions escalate, signalling its resolve to maintain record-low rates for some time.
The dovish tone of the Reserve Bank of New Zealand's (RBNZ) statement, which nodded to a recent run of weak data, reaffirmed market expectations that no rate hike was on the near-term horizon and even led some analysts to project a slim but possible chance of a rate cut.
The central bank held the official cash rate at 1.75 percent for the 11th straight review as it works to boost inflation to 2 percent, the center of its target band.
The RBNZ's statement had a slightly more dovish tone than taken at its meeting in May, adding warnings over recent weakness in economic growth and the potential fallout from escalating trade tensions among major economies.
"The recent weaker gross domestic product (GDP) out turn implies marginally more spare capacity in the economy than we anticipated," it said.
Trade tensions in some major economies also "tempered slightly" prospects that robust global demand will underpin New Zealand's economy, the RBNZ said in its strongest warning to date of the harm the such frictions could inflict on trade and business activity.
"What we've got in our judgment is slightly on the dovish side," said Nick Tuffley, chief economist at ASB Bank.
"If we don't see any material improvement in business confidence or we see a lot more impact coming through from global trade tensions, you can't rule out a cut either."
The RBNZ said monetary policy will remain expansionary "for a considerable period of time", underscoring a dominant market view that there will be no rate hike until mid-2019 at the earliest.
Gloomy outlook
The New Zealand dollar barely reacted to the announcement, rebounding to around $0.68 after a dip to $0.6783. Major central banks have struggled with soft inflation even as their economies strengthened on robust global trade, now under threat from trade frictions triggered by U.S. President Donald Trump's "America First" policies.
New Zealand is no exception with headline annual inflation having slowed to 1.1 percent in the first quarter, just off the bottom of the RBNZ's target range of 1 to 3 percent.
Economic growth slowed to 0.5 percent in the first three months of this year, undershooting the RBNZ's forecast.
A survey on Wednesday showed business confidence sank to a seven-month low in June, a sign the economy may be in for a soft patch.
"We are now worried that growth could slow by more than we have assumed," Capital Economics said, projecting that rates won't rise until mid-2020.
Analysts at ANZ expect a rate hike in November next year but warn that "a lot can happen between now and then".
"We see risks to domestic inflation as skewed to the downside, and we could equally argue for a flat track.
And if conditions deteriorated significantly, a cut could eventuate quite rapidly," they said.