Central Banks

New Zealand central bank holds rates, signals accommodative policy through 2020

Key Points
  • The Reserve Bank of New Zealand held the official cash rate (OCR) at a record low of 1.75 percent on Wednesday.
  • The central bank's Governor Adrian Orr said the bank expects to keep rates at their current level through 2019 and 2020.
  • The central bank also emphasised that policy will remain accommodative for a considerable period as risks to economic growth increased.
Adrian Orr, governor of the Reserve Bank of New Zealand (RBNZ), speaks during a news conference in Wellington, New Zealand, on Thursday, Aug. 9, 2018.
Birgit Krippner | Bloomberg | Getty Images

New Zealand's central bank on Wednesday held the official cash rate (OCR) at a record low of 1.75 percent and emphasized that policy will remain accommodative for a considerable period as risks to economic growth increased.

"The direction of our next OCR move could be up or down," Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr said in a statement accompanying the policy decision.

Orr said the central bank expects to keep rates at their current level through 2019 and 2020.

The RBNZ forecast rates at 1.84 percent in December 2020, pulling back from an earlier prediction of 2.0 percent by then.

Rates did not cross 2 percent until September 2021 in the latest projections.

The New Zealand dollar jumped 1.3 percent to a one-week high of $0.6827 after the decision as many in the market had positioned for a more dovish stance. The currency last stood at $0.6799.

Over recent weeks markets had been betting on a clear easing bias in the face of rising global pressure and as a number of major central banks, including the neighboring Reserve Bank of Australia (RBA), downgraded growth forecasts.

The RBNZ acknowledged ramped up international risks, especially the chance of a sharper downturn in key trading partners' growth, but said that these were tempered by domestic factors.

"Despite the weaker global impetus, we expect low interest rates and government spending to support a pick-up in New Zealand's GDP growth over 2019," Orr said.

That more optimistic outlook came despite recent figures showing economic growth slumped to 0.3 percent in the third quarter, its slowest pace in nearly five years and missing the bank's forecast of 0.7 percent.

"The statement reinforces the 'lower for longer' view. But both our and the RBNZ's OCR views are contingent on the economy regaining momentum over 2019," said ASB chief economist Nick Tuffley.

"The strength (or otherwise) of the economy this year will be pivotal to whether the RBNZ remain on hold or does indeed cut the OCR."