Central bank cuts inflation forecasts amid slower growth
Governor Spencer expects kiwi dollar to weaken over time
New Zealand’s central bank held interest rates at a record low and projected they will stay there until mid-2019 as inflation remains subdued amid slower economic growth.
“Monetary policy will remain accommodative for a considerable period,” Reserve Bank Acting Governor Grant Spencer said Thursday in Wellington after keeping the official cash rate at 1.75 percent. The RBNZ maintained its view that it will start to raise the OCR in the second quarter of next year.
The benchmark has been at a historic low for more than a year as New Zealand’s strong exchange rate and weak global inflation exert downward pressure on prices. The RBNZ today lowered its inflation forecasts after the kiwi dollar’s 6 percent gain the past two months and a slump in business confidence following the election of a Labour-led government last year.
The bank now expects inflation to reach the midpoint of its 1-3 percent target in the third quarter of 2020, two years later than previously forecast.
“A clear theme of inflation remaining lower for longer is emerging,” said Nick Tuffley, chief economist for ASB Bank Ltd. in Auckland. “The risk is the RBNZ can afford to wait longer until lifting the OCR than our long-held view of February 2019.”
The kiwi dollar fell after the statement, trading at 72.20 U.S. cents at 9:47 a.m. in Wellington from 72.57 cents beforehand. The currency has surged against a weaker U.S. dollar this year after dropping to a 17-month low in mid-November.
“The exchange rate has firmed since the November statement, due in large part to a weak U.S. dollar," Spencer said. “We assume the trade-weighted exchange rate will ease over the projection period.”
A majority of economists now expect the first rate hike in 2019 after a Jan. 25 reports showed consumer prices rose less than forecast. Investors now see a 56 percent chance of an increase late this year. That’s down from 100 percent in November.