Reserve Bank warns weak growth may see interest rates cut further

Wednesday, 26 June 2019

Reserve Bank Governor Adrian Orr. The central bank left the OCR unchanged on Wednesday but said a lower rate 'may be needed'.

New Zealand's economy is turning out to be weaker than the Reserve Bank expected, raising the odds that it will cut interest rates further.

On Wednesday the Reserve Bank left the official cash rate (OCR) unchanged at 1.5 per cent, but the monetary policy committee said a further help from interest rates to boost the economy 'was likely to be necessary'.

The committee did discuss cutting interest rates this month, but opted to wait.

Economists had expected interest rates would be left unchanged on Wednesday, with attention focused on what it would do next.

* Reserve Bank cuts official cash rate to all-time low

* How low could interest rates go, as employment and inflation weaken?**

As a result of the downbeat language, ANZ chief economist Sharon Zollner said the bank now expected interest rates to be cut in August.

Prior to the latest Reserve Bank announcement, ANZ had expected the central bank to leave interest rates unchanged until November.

'Given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower OCR may be needed over time to continue to meet our objectives,' the Reserve Bank said in a statement.

New Zealand's economy had slowed over the past year, with a pick up in the construction sector offset be weakness in the services sector, it said.

'Softer house prices and subdued business sentiment continue to dampen domestic spending.'

The OCR influences the rate at which lenders borrow and the interest rates paid to depositors.

In May the Reserve Bank cut the OCR to a record low of 1.5 per cent, causing banks to cut both mortgage and deposit rates.

Westpac chief economist Dominick Stephens said Wednesday's statement 'seems to have ramped up the likelihood' that the OCR will be cut further.

ASB senior economist Mark Smith said the bank expected the OCR would drop to 1.25 per cent in August, which would represent a 'trough' for the cash rate.

Some economists have been speculating in recent weeks that the OCR could drop below 1 per cent next year.

'We think it is increasingly likely,' Kiwibank chief economist Jarrod Kerr said, with the Reserve Bank following other central banks in lowering borrowing rates.

'The global outlook has deteriorated, and central banks around the world are lining up and are either adding stimulus or are preparing to do so.'

While Kerr said in theory the Reserve Bank could move towards negative interest rates in a crisis, cutting the OCR below 0.5 per cent may be ineffective.

Instead, the Reserve Bank may opt for quantitative easing - often referred to as printing money - to help stoke the economy.

The New Zealand dollar was little changed on Wednesday's announcement.

The Reserve Bank said the outlook for the global economy had weakened, with risks to global trade intensifying.

'A number of central banks are easing their monetary policy settings to support demand. The weaker global economy is affecting New Zealand through a range of trade, financial, and confidence channels.'

Low interest rates and increased government spending was expected to support an increase in economic growth and employment, pushing inflation towards 2 per cent with employment remaining strong.

However the Reserve Bank warned that the risks could be to a weaker employment market.

'Given the downside risks around the employment and inflation outlook, a lower OCR may be needed.'