28 Jun 2018

Cash rate holds at record low 1.75%

10:16 am on 28 June 2018

The Reserve Bank has held its cash rate unchanged as expected amid subdued inflation and softening economic growth.

No caption

Reserve Bank governor Adrian Orr Photo: supplied

The official cash rate (OCR) was held at a record low 1.75 percent, where it has been since late 2016.

Reserve Bank governor Adrian Orr said employment was near sustainable levels, but growth was more moderate and the government's spending policies were not expected to give the same stimulus as previously expected.

"We are well positioned to manage change in either direction - up or down - as necessary," he said in a statement.

Mr Orr said strong domestic demand has helped the economy, but inflation pressures remain muted and are expected to remain so in the near term, although the regional fuel tax coming into effect would lift inflation in the near term.

He said ongoing spending and investment, by both households and government, would support economic growth and employment demand, as would an improving world economy.

But Mr Orr also noted the risks arising from global trade tensions and volatility in emerging economies.

"The best contribution we can make to maximising sustainable employment and maintaining low and stable inflation is to ensure the OCR is at an expansionary level for a considerable period," he said.

The statement retained its more explicit tone that the new governor has brought in and once again made no mention of the housing market, one of the Reserve Bank's constant concerns over recent years.

The government has imposed a new mandate on the central bank, which required it to maximise employment as well as keep inflation within the long established 1-3 percent target band.

ASB chief economist Nick Tuffley said the statement showed risks were rising at home and abroad and that meant rates were likely to be on hold for longer.

"We now expect the tightening cycle to start in November 2019 (previously August). We also see growing risk that the next move may be a cut, rather than a hike," he said.

The New Zealand dollar, already at a seven-month low from overnight weakness, fell slightly but then recovered to settle around US68 cents.