Cash rate on hold for a while

Global uncertainty keeps lid on

The official cash rate looks set to stay on hold longer than markets had anticipated f oll owing t he Reserve Bank’s monetary policy statement. The central bank’s cautious forecasts, tempered by global uncertainty, now suggest a rate hike could be as far away as late 2019 or early 2020.

That’s unlikely to hold back mortgage interest rates which are rising because of international borrowing costs — but it could temper the pace of those rises.

The wholesale cost of borrowing in New Zealand fell after the announcement, along with the kiwi dollar.

The bank said a recovery in commodity prices and more positive business and consumer sentiment in advanced economies have improved the global outlook.

However, it said major challenges remained in the form of ongoing surplus capacity in the global economy and rising geopolitical uncertainty.

New Zealand’s financial conditions had firmed with long-term interest rates rising and continued upward pressure on the New Zealand dollar exchange rate.

“The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradeables sector,” the bank said in a statement.

“A decline in the exchange rate is needed.”

Looking ahead, the Reserve Bank said: “Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”

The dollar fell from US73.05c just before the release to US72.63c in the minutes following. ANZ senior economist Phil Borkin said the decline reflected the fact that there was no tightening bias in the statement, as some had expected.

The bank said economic growth in New Zealand had increased, as expected, and was steadily drawing on spare resources.

“The outlook remains positive, supported by ongoing accommodative monetary policy, strong population growth, increased household spending and rising construction activity,” the bank said.

“The statement was very neutral and the market was looking for something a little less neutral,” ANZ’s Borkin said.

“The Reserve Bank is still showing a lot of caution,” he said.

“They acknowledge that there has been a lot of improvement in the economy but they caveat that with a lot of cautious rhetoric as well.”

Dairy prices have recovered in recent months but uncertainty remained around future outcomes, it said. The recent moderation in house price inflation was welcome, and in part reflected loanto-value ratio restrictions and higher mortgage rates, it said. “It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand,” the bank said. “Inflation is expected to return to the midpoint of the (1 to 3 per cent) target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradeables inflation,” it said. “Longerterm inflation expectations remain well-anchored at around 2 per cent.” Finance Minister Steven Joyce confirmed on Tuesday that Governor Graeme Wheeler would not seek a second term and will step down on September 26. He will deliver two more OCR announcements before he steps down.

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