The Reserve Bank kept the official cashrate at 1.75% today, and governor Adrian Orr projected that it would stay at that level into 2020.
That’s longer than the bank projected in its May statement. Also, it doesn’t mean a rate rise at the end of that period: “The direction of our next official cashrate move could be up or down,” Mr Orr said.
The bank governor’s view contrasted with recent business survey predictions of a slowing economy, although he hedged his bets, acknowledging that low business confidence can affect employment & investment decisions.
The bank analysis
“While recent economic growth has moderated, we expect it to pick up pace over the rest of this year and be maintained through 2019.
“Robust global growth & a lower $NZ exchange rate will support export earnings. At home, capacity & labour constraints promote business investment, supported by low interest rates. Government spending & investment is also set to rise, while residential construction & household spending remain solid.
“The labour market has tightened over the past year and employment is roughly around its maximum sustainable level. We expect the unemployment rate to decline modestly from its current level.
“There are welcome early signs of core inflation rising. Inflation will increase towards 2%t over the projection 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.
“Risks remain to our central forecast. The recent moderation in growth could last longer. Low business confidence can affect employment & 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.
“We will keep the official cashrate at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low & stable inflation.”
August 2018 Monetary policy statement (PDF 1.69 MB)
Attribution: Bank release.