‘Watch, worry and wait’: Orr
Reserve Bank’s time extension on cash rate has immediate impact on currency
The New Zealand dollar tumbled 1.2 per cent against its trading partners and interest rate swaps fell after the Kiwi central bank said rates would stay at record lows for up to a year longer than previously indicated.
The kiwi fell to US66.73 cents from US67.53c on Wednesday. The tradeweighted index dropped 71.80 from 72.68.
New Zealand’s two-year swap rate fell 7 basis points to 2.03 per cent while 10-year swaps were down 9 basis points to 2.92 per cent.
The kiwi was also sharply weaker against the
“At home, capacity and labour constraints promote business investment, supported by low interest rates,” he said.
“Government spending and investment is also set to rise, while residential construction and household spending remain solid,” Orr said.
There were some welcome early signs of core inflation rising, Orr added.
Inflation will increase towards 2 per cent over the projection period as capacity pressures bite, Orr said.
“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.
Orr said the bank would keep the OCR “at an expansionary level” for a considerable period to contribute to Australian dollar as the two central banks’ policy tracks diverge, trading at 89.74 from 90.91 cents. Reserve Bank of Australian governor Philip Lowe essentially ruled out a rate cut across the Tasman.
“The change to the New Zealand central bank’s forecasts were “a surprise after a long time without any surprises from the Reserve Bank,” said Imre Speizer, head of NZ strategy at Westpac Banking Corp.
The kiwi fell to 4.5521 Chinese yuan from 4.6055 yuan and dropped to 51.83 British pence from 52.14.
It declined to 57.48 euro cents from 58.10 cents and fell to 73.94 yen from 75.13 yen.
— maximising sustainable employment and maintaining low and stable inflation.
The central bank revised down its forecast of the average rate of GDP growth in the four quarters to Q1 2019 from 3.1 per cent to 2.6 per cent.
Deputy governor Geoff Bascand said the slightly slower growth in the economy had brought about a change in the bank’s thinking.
“We have had slightly slower growth for a while and that means that the expected pick-up in capacity pressure has been delayed,” Bascand told the Herald in a phone interview.
“The economy is still doing okay. It is still growing, but it’s not growing quite as much as we expected,” Bascand said.
“That means that a rise in inflation and a tightening of the labour market is just a bit delayed.”
The output gap — a measure of the difference between the actual output of an economy and the output it could achieve at full capacity — would be softer for longer.
“The story we are telling is one of good growth. It’s not a story of gloom. It is a story of taking slightly longer to get to a target.”
Westpac chief economist Dominick Stephens said it appeared the Reserve Bank had accepted economic growth is falling short of its previous, bullish forecasts.
“The intensity of the Reserve Bank’s reaction [yesterday] to the slowdown in growth surprised us and financial markets,” he said in a commentary.