No interest rate change before 2020, says Orr

Reserve Bank governor Adrian Orr. Photo: NZ Herald
Reserve Bank governor Adrian Orr. Photo: NZ Herald
Reserve Bank governor Adrian Orr has kept the official cash rate at 1.75% as widely expected but says he now expects to keep rates on hold for at least a year longer than previously thought and reiterated the next move could be up or down.

"We expect to keep the OCR at this level through 2019 and into 2020, longer than we projected in our May statement.  The direction of our next OCR move could be up or down." Orr said in the monetary policy statement today.

The New Zealand dollar fell to 67.17 US cents as at 9.15am versus 67.46 US cents just prior to the statement.

The central bank's forecasts now show the OCR lifting to 1.9 % in September 2020 versus a prior forecast of September 2019.

A full-rate hike is now signalled by December 2020, when the benchmark rate is forecast to be 2 %.

The central bank had previously signaled it would reach that level in March 2020.

The Reserve Bank is charged with keeping annual inflation between 1% and 3% with a focus on the mid-point and with supporting maximum levels of sustainable employment within the economy.

Orr said there are "welcome early signs of core inflation rising" and he expects inflation to increase toward 2% over the projected period as capacity pressures bite.

"This path may be bumpy, however, with one-off price changes from global oil prices, a lower exchange rate, and announced petrol excise tax rises expected.

"We will look through this volatility as appropriate, and only respond to any persistent movements in inflation," he said.

The Reserve Bank's forecasts now see annual inflation hitting the 2% midpoint in March 2021 versus December 2020 in the May projection.

The consumers price index rose 0.4% in the three months ended June 30, while annual inflation was 1.5%. However, there were emerging signs of wage inflation in recent labour data as the impact of a lift in minimum wage kicks in and migration continues to slow.

All 16 economists polled by Bloomberg expected the OCR to remain on hold at a record low 1.75% today and the median of 11 expect rates to lift to 2% by the third quarter of 2019.

Orr underscored there are risks to its central forecast and said "the recent moderation in growth could last longer." Also, low business confidence can affect employment and investment decisions.

Government data show gross domestic product (GDP) expanded 0.5% in the three months to March 31 versus a revised 0.6% expansion in the fourth quarter and was 2.7 % higher on the year.

The result undershot the central bank's forecast for 0.7% quarterly growth.

The Reserve Bank lowered its short-term growth forecasts but does see the GDP picking up faster toward the end of the forecast period.

- By Rebecca Howard of BusinessDesk


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