Reserve Bank governor points to lower growth and rising trade tension as cash rate is left unchanged

Thursday, 28 June 2018

The Reserve Bank has left the official cash rate (OCR) unchanged, but hinted that the economy may be running slightly slower than expected.

The benchmark rate has an influence on interest rates earned and paid by consumers, especially short term ones, however the impact has diminished as it has fallen to record lows.

Governor Adrian Orr said that while the outlook he detailed in his first interest rate decision 'remains intact', the drivers of the economy may not be as strong as though.

'The recent weaker [economic growth figures] implies marginally more spare capacity in the economy than we anticipated,' Orr wrote.

'The Government's projected spending impulse is also slightly lower and later than anticipated.'

The OCR would stay at 1.75 per cent 'for now', Orr added.

'However, we are well positioned to manage change in either direction – up or down – as necessary.'

ASB chief economist Nick Tuffley said the governor appeared to be giving himself more wriggle room, pointing to trade tensions and more capacity in the economy than he expected in May.

The bank said it now forecasts that the OCR will be unchanged until November 2019, three months later than it predicted before Thursday's announcement.

'We also see growing risk that the next move may be a cut, rather than a hike,' Tuffley said.

The New Zealand dollar is up slightly compared to just before the decision was released.

Orr said employment was 'around its sustainable level' while inflation was below 2 per cent, meaning monetary policy needed to be supportive for 'some time to come'.

Global growth would support demand for New Zealand products and services, however the outlook 'has been tempered slightly by trade tensions in some major economies'.