The Reserve Bank (RBNZ) has held its benchmark interest rate at a record low, but signalled it’s ready to cut again to support the economy, sending the currency surging.

The official cash rate (OCR) was kept steady at 1.0 percent, as the monetary policy committee, which now sets the cash rate, decided that there was no major change in the outlook since the surprise 0.5 percent cut in August.

“Economic developments since the August Statement do not warrant a change to the already stimulatory monetary setting at this time,” the committee said in a statement.

The decision was finely balanced with economists thinking steadier economic conditions at home and abroad, and decisions to hold rates by several overseas central banks would influence the RBNZ to sit on the sidelines.

“Growth in global trade and manufacturing is weak and uncertainty remains high, dampening global business investment. However, New Zealand’s export commodity prices have been robust, underpinning a positive terms of trade.”

The OCR has been cut from 1.75 percent to its current level this year after being on hold for more than two years.

“Interest rates will need to remain at low levels for a prolonged period.”

Forecasts issued with the statement implied no change to the cash rate before a rise in early 2022.

The economy was expected to pick up through next year with lower rates feeding through into activity, higher wages, and government spending.

The RBNZ said interest rates were low around the world and the economy would need low interest rates to support activity and to meet its inflation and employment objectives.

It also noted that a lower New Zealand dollar has helped to offset some of the economic weakness, by improving export earnings.

“The risks to the economy in the near term are tilted to the downside and (we) agree we will add further monetary stimulus if economic developments warrant it, the committee said.

The New Zealand dollar gained about three-quarters of a cent against the US dollar after the decision, settling at around 64 US cents, as financial markets had been favouring a rate cut.

Wholesale interest rates also rose sharply.

An economist called the decision a surprise and said the RBNZ’s assessment of the economy was “too rosy”, and further rate cuts would be needed.

“We continue to expect the OCR will eventually fall to 0.5 percent. The most likely timing is the February and May monetary policy releases,” ASB chief economist Nick Tuffley said.

This article was originally published on RNZ and re-published with permission.

Leave a comment