Adrian Orr again sees the Official Cash Rate on hold until 2020 because inflation is below two percent. Bernard Hickey analyses the Reserve Bank’s latest decision.

The Reserve Bank has held the Official Cash Rate at a record low 1.75 percent for a 13th consecutive time and repeated it could hold it there until into 2020 because inflation remains below the two percent mid-point of the bank’s target range.

That would mean the OCR could be held at that level for close to four years, with the chance it could be cut even lower.

Governor Adrian Orr also repeated his strictly neutral stance, saying the next move in the rate could be either up or down. The expectation of a flat OCR until 2020 was no different to the Reserve Bank’s last comments with its full August Monetary Policy Statement.

This decision to hold was an ‘in between’ decision that involved the issuance of a short statement and no news conference, unlike the full Monetary Policy release every three months or so. The next full statement is due on November 8.

“We expect to keep the OCR at this level through 2019 and into 2020. The direction of our next OCR move could be up or down,” Orr said in today’s statement.

This wording was unchanged from August.

However, the statement did emphasise in its second paragraph that consumer price inflation remained below the two percent mid-point of its target range, “necessitating continued supportive monetary policy.”

The opening statement in August was not quite so blunt about inflation being below the two percent point.

The Reserve Bank repeated that it saw the pace of economic growth picking up over the coming year, “assisting inflation to return to the target mid-point.”
“Our projection for the New Zealand economy, as detailed in the August Monetary Policy Statement, is little changed.  While GDP growth in the June quarter was stronger than we had anticipated, downside risks to the growth outlook remain,” Orr said.
He said there were welcome early signs of core inflation rising towards the mid-point of the target, although he noted the bank would ‘look through’ higher fuel prices in the near term.

“We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.”

That final paragraph in the statement was also unchanged from August.

Fed hikes though

Meanwhile, the US Federal Reserve announced this morning it had raised its official Federal Funds Rate by 25 basis points to up to 2.25 percent, which was almost universally as expected. This was the third hike this year and a fourth is now widely expected in December.

That would further widen the gap between US and New Zealand interest rates, making the US dollar relatively more attractive.

The New Zealand dollar was broadly stable at 66.7 USc this morning after the two decisions, which were in line with market expectations.

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