Reserve Bank says the benchmark official cash rate will stay at 1.75 per cent until at least 2020

Thursday, 9 August 2018

Reserve Bank Governor Adrian Orr delivering the bank's Official Cash Rate decision in August 2018.

The Reserve Bank has signalled it will leave the official cash rate (OCR) unchanged until at least 2020, as concerns around the economy build.

While economists expected the benchmark rate to be left unchanged on Thursday, the bank's guidance sees it staying at the current low for considerably longer than most forecasters were predicting.

Shortly after the news the New Zealand dollar dropped around half a cent against the US dollar. Just before 9:30am the kiwi was buying US67.09c, close to the lowest level in more than two years.

Reserve Bank Governor Adrian Orr delivering his first Monetary Policy Statement in May.

The OCR has a strong influence on the interest rates Kiwis pay on mortgages and earn on savings, especially floating and short term rates, although the influence has diminished the lower interest rates have fallen.

'We expect to keep the OCR at this level through 2019 and into 2020, longer than we projected in our May Statement,' governor Adrian Orr said in the opening lines of the statement.

'The direction of our next OCR move could be up or down.'

Orr said that the economy was expected to pick up pace before the end of the year, but there were risks that this may not happen. In the Reserve Bank's latest forecasts, the economy is expected to grow by about 2.8 per cent over the coming year, 0.5 percentage points lower than it expected at its last major update in May.

The forecasts see lower growth in the next nine months before forecasting the economy will pick up in 2019.

'Risks remain to our central forecast. The recent moderation in growth could last longer,' Orr said.

'Low business confidence can affect employment and investment decisions. Conversely, there is a chance that inflation could increase faster if cost pressures can pass through into higher prices and impact inflation expectations.'

Westpac senior economist Michael Gordon said he was surprised by degree of reaction from the central bank since May.

'While growth has slowed, we don't think that it will remain as soft over the rest of this year as the Reserve Bank expects,' Gordon said.

'June quarter [economic growth], for instance, is actually shaping up quite strong.'

ASB chief economist Nick Tuffley said his forecasts were for stronger inflation than the Reserve Bank's, as well as stronger growth forecasts and as a result was forecasting the OCR would begin to rise in late 2019.

However Tuffley conceded that in terms of growth forecasts there was 'a greater degree of uncertainty than usual given the persistent weakness in business confidence to date this year'.

On Monday, Treasury warned that the forecasts in May's Budget were at risk of being missed as a result of global issues, a cooling housing market and falling business confidence.