The Reserve Bank held the official cashrate at 1% today after the bank’s monetary policy committee agreed that new information since its August statement didn’t warrant a significant change to the outlook.
The bank issued 2 statements, one from its governor, Adrian Orr, and the other a summary of the new monetary policy committee’s meeting.
Broadly, the Reserve Bank is aware that confidence is down, but says it has scope for more stimulus if necessary.
Bank governor Adrian Orr said:
“Employment is around its maximum sustainable level and inflation remains within our target range but below the 2% midpoint.
“Global trade & other political tensions remain elevated and continue to subdue the global growth outlook, dampening demand for New Zealand’s goods & services. Business confidence remains low in New Zealand, partly reflecting policy uncertainty & low profitability in some sectors, and is impacting investment decisions.
“Global long-term interest rates remain near historically low levels, consistent with low expected inflation & growth rates into the future. Consequently, New Zealand interest rates can be expected to be low for longer.
“The reduction in the official cashrate this year has reduced retail lending rates for households & businesses, and eased the $NZ exchange rate.
“Low interest rates & increased Government spending are expected to support a pickup in domestic demand over the coming year. Household spending & construction activity are supported by low interest rates, while the incentive for businesses to invest will grow in response to demand pressures.
“Keeping the official cashrate at low levels is needed to ensure inflation increases to the midpoint of the target range and employment remains around its maximum sustainable level. There remains scope for more fiscal & monetary stimulus, if necessary, to support the economy and maintain our inflation & employment objectives.”
In addition to the statement issued by Mr Orr, the bank issued a summary of the monetary policy committee’s meeting:
“The committee agreed the new information since the August monetary policy statement did not warrant a significant change to the monetary policy outlook.
“The committee noted that employment remains close to its maximum sustainable level but consumer price inflation remains below the 2% target midpoint.
“The committee members discussed the initial impacts of reducing the official cashrate to 1% in August. They were pleased to see retail lending interest rates decline, along with a depreciation of the exchange rate.
“The members anticipated a positive impulse to economic activity over the coming year from monetary & fiscal stimulus. The members noted that there remains scope for more fiscal & monetary stimulus if necessary, to support the economy & our inflation & employment objectives.
“The committee noted that, while gdp growth had slowed over the first half of 2019, impetus to domestic demand is expected to increase. Household spending & construction activity are supported by low interest rates, while business investment should lift in response to demand pressures.
“The committee expected increasing demand to keep employment near its maximum sustainable level. Rising capacity pressures & increasing import costs, higher wages & pressure on margins are expected to lift inflation gradually to 2%.
“The committee discussed the long & variable lags between monetary policy decisions & outcomes.
“The members noted several key uncertainties affecting the outlook for monetary policy, where there was a range of possible outcomes.
“Global trade & other geopolitical tensions remain elevated and continue to subdue the global growth outlook, dampening demand for New Zealand’s goods & services.
“Business confidence remains low in New Zealand, partly reflecting policy uncertainty & low profitability in some sectors, and is affecting investment decisions.
“Fiscal policy is expected to lift domestic demand over the coming year. However, any increase in Government spending could be delayed or it could have a smaller impact on domestic demand than assumed.
“Some members noted that ongoing low inflation could cause inflation expectations to fall. Others noted that this risk was balanced by the potential for rising labour & import costs to pass through to inflation more substantially over the medium term.
“The committee discussed the secondary objectives from the remit and remained comfortable with the monetary policy stance.
“The committee agreed that developments since the August statement had not significantly changed the outlook for monetary policy. They reached a consensus to keep the official cashrate at 1% and that, if necessary, there remains scope for more fiscal & monetary stimulus.”
Attribution: Bank release.