Central Banks

New Zealand keeps interest rates unchanged, dashing easing expectations

Key Points
  • New Zealand's central bank kept interest rates unchanged on Wednesday, saying aggressive easing earlier this year meant current policy settings were appropriate, but left the door open for more monetary stimulus.
  • The decision dashed market expectations for a cut and sent the New Zealand dollar soaring, with the majority of the economists in a Reuters poll having tipped an easing in the final policy meeting for the year.
  • A lower New Zealand dollar exchange rate this year provided a useful additional offset to the weaker global economic environment, RBNZ said.
Ten new zealand dollar with coins
Angelo NZ | Getty Images

New Zealand's central bank kept interest rates unchanged on Wednesday, saying aggressive easing earlier this year meant current policy settings were appropriate, but left the door open for more monetary stimulus.

The decision dashed market expectations for a cut and sent the New Zealand dollar soaring, with the majority of the economists in a Reuters poll having tipped an easing in the final policy meeting for the year.

"We expect economic growth to remain subdued over the remainder of the calendar year. We will continue to monitor economic developments and remain prepared to act as required," RBNZ's monetary policy committee said in a statement accompanying the rates decision.

A lower New Zealand dollar exchange rate this year provided a useful additional offset to the weaker global economic environment, RBNZ said.

A record of Wednesday's meeting showed the committee agreed that an accommodative monetary policy remains necessary to continue to meet their inflation and employment objectives.

The New Zealand dollar rose to $0.6413 from $0.6300.

The RBNZ stunned markets with a steep 50 basis point cut in August, in an attempt to get ahead of policy easings in the United States and Australia and to prop up below-par growth in New Zealand's $200 billion economy.

However, business sentiment remains weak and inflation has drifted further away from the midpoint of the RBNZ's 1% to 3% target band.

RBNZ said in the statement that the low OCR has helped lower lending rates more generally, which in turn have supported spending and investment.

Rising capacity pressures are projected to promote a pick-up in business investment, it added.

The New Zealand dollar rose to $0.6413 from $0.6300.

Capital Economics said the bank was too optimistic about the prospects for growth in New Zealand.

"The Reserve Bank of New Zealand sounded cautious when it left rates on hold today but we believe that a deterioration in the economy will force the bank to 0.5% by early next year," Capital Economics analyst Ben Udy said in a note.

The RBNZ now has a dual mandate of targeting maximum sustainable employment, which has put the spotlight on labor figures. Data released last week showed unemployment ticking up from a decade low but still below what the bank forecast in August.

Australia's central bank decided to keep policy unchanged at its meeting last week having delivered three rate cuts this year.