The Reserve Bank (RBNZ) has held its cash rate unchanged, as expected, amid softening economic growth and stronger inflation, but signalled it expects to keep rates low for longer.
The prospect of the RBNZ being on hold for longer triggered a broadbased fall in the New Zealand dollar. Photo: RNZ
The official cash rate (OCR) was held at a record low 1.75 percent, where it has been since late 2016.
RBNZ Governor Adrian Orr said employment was near sustainable levels, but growth was more moderate although it should pick up over the rest of this year and into next year.
However, it struck a more explicit dovish tone and said it might take longer before it moved rates again.
"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."
It was the first time the RBNZ has explicitly mentioned 2020.
The prospect of the RBNZ being on hold for longer triggered a broadbased fall in the New Zealand dollar. It fell about half a cent to a one-month low of US66.98 cents.
Mr Orr noted core inflation pressures were picking up, and headed towards the central bank's 2 percent target.
"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," he said, adding that the bank would generally discount any initial volatility.
Ongoing spending and investment, by both households and government, would support economic growth and the housing market was still solid, he said.
Mr Orr said there were risks, which justified the RBNZ keeping interest rates low.
"The recent moderation in growth could last longer. Low business confidence can affect employment and investment decisions.
"Conversely, there is a chance that inflation could increase faster if cost pressures can pass through into higher prices and
impact inflation expectations," he said.
An economist said the statement was generally neutral but showed risks were rising at home.
"We continue to expect that the OCR will stay on hold until November 2019, though the RBNZ's new view is it will be on hold for longer. The important thing is that there is absolutely no urgency for the OCR to increase for a considerable period," said ASB's chief economist Nick Tuffley.