10 May 2018

Reserve Bank keeps cash rate at 1.75%

10:27 am on 10 May 2018

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

Reserve Bank Governor Adrian Orr.

Reserve Bank Governor Adrian Orr. Photo: RNZ / Patrick Omeara

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 the economic growth and employment remain robust, near their sustainable levels. But in contrast to previous statements, he was more explicit about the outlook.

"The direction of our next move is equally balanced, up or down. Only time and events will tell," he said in a statement.

Mr Orr noted strong domestic demand has helped the economy, but inflation pressures remain muted and are expected to remain so in the near term.

He said ongoing spending and investment, by both households and government, is expected to support economic growth and employment demand, while business investment should also increase as the economy hits full capacity.

"To best ensure this outcome, we expect to keep the OCR at this expansionary level for a considerable period of time. This is the best contribution we can make, at this moment, to maximising sustainable employment and maintaining low and stable inflation," Mr Orr said.

The statement was slightly more explicit in its language about the outlook, and made no mention of the housing market, one of the RBNZ'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 to 3 percent target band.

An economist said the statement was more explicit, simple and clear than previously, but did not alter the main message that the next move in interest rates is likely to be a rise around mid-to-late 2019.

"We continue to expect the RBNZ to remain on hold until at least August 2019. There remains no urgency for the OCR to go up - or down - for some time," said ASB's chief economist Nick Tuffley.

The New Zealand dollar fell close to half a cent after the RBNZ statement, as financial markets scaled back the chances of a rise in interest rates anytime soon.

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