GDP growth is strong, unemployment is low and inflation is picking up, yet the RBNZ is not even close to hiking interest rates

  • The Reserve Bank of New Zealand (RBNZ) left its cash rate unchanged for a 24th consecutive month in November.
  • It still forecasts that policy settings will start to tighten by the middle of 2020, unchanged from three months ago. Nor will it completely rule out another rate cut.
  • It says it will keep its cash rate at an expansionary level for a “considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation”.
  • Along with its inflation target — something it has yet to achieve — other areas that could lead to an earlier shift in policy stance include a lessening of trade tensions or an improvement in New Zealand business confidence.

New Zealand unemployment is at the lowest level in over a decade, GDP growth was strong in the June quarter with the early indications suggesting that continued in the September quarter and inflation, while below target, is starting to lift.

However, despite that seemingly glowing economic report card, the Reserve Bank of New Zealand (RBNZ) is in no rush to lift its overnight cash rate, keeping it steady at 1.75% in November, as expected.

Based on its updated economic projections, it doesn’t see the cash rate rising until the June quarter of 2020, the same period it nominated three months ago. Nor will it completely rule out the potential for another rate cut.

“We expect to keep the overnight cash rate (OCR) at this level through 2019 and into 2020,” said RBNZ Governor Adrian Orr.

“There are both upside and downside risks to our growth and inflation projections. As always, the timing and direction of any future OCR move remains data dependent.

“We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.”

So while Orr dropped the line that the next move in the OCR could be both “up or down”, he’s still not completely ruling out the prospect of further cuts should the economy start to deteriorate.

Despite some pretty decent economic data since the RBNZ last met, Orr delivered an assessment to help curb enthusiasm about the prospect of earlier-than-expected rate hikes.

“The pick-up in GDP growth in the June quarter was partly due to temporary factors, and business surveys continue to suggest growth will be soft in the near term,” he said.

“Employment is around its maximum sustainable level. However, core consumer price inflation remains below our 2% target mid-point, necessitating continued supportive monetary policy.”

That last point is important, and helps explain why the RBNZ is in no rush to preemptively tighten policy settings, especially given the view the recent economic growth spurt was likely temporary and the risks from a potential business investment slowdown ahead.

The acknowledgement of weak business confidence also means this data release could potentially act as a trigger for a change in policy stance from the RBNZ, particularly should it improve.

Over the longer-term, however, Orr nominated plenty of reasons to be confident about the outlook for the New Zealand economy.

“GDP growth is expected to pick up over 2019,” he said.

“Monetary stimulus and population growth underpin household spending and business investment. Government spending on infrastructure and housing also supports domestic demand.”


He also expressed no concern about the recent rebound in the New Zealand dollar, acknowledging its current level will “support export earnings”.

Along with weaker business investment, Orr nominated an elongated period of trade tensions as another potential downside risk for the economy.

As with business confidence, any lessening in trade tensions could also act as a trigger for a change in tact from the bank.

On the outlook for inflation, Orr said building capacity constraints are expected to see core inflation lift to around 2%, with upside risks attached.

“Upside risks to the inflation outlook also exist,” he said.

“Higher fuel prices are boosting near-term headline inflation. We will look through this volatility as appropriate.

“Our projection assumes firms have limited pass through of higher costs into generalised consumer prices, and that longer-term inflation expectations remain anchored at our target.”

There’s has been limited financial market reaction to the RBNZ release, partially reflecting that New Zealand financial markets had preemptively moved ahead of today’s release.

The lack of movement may also reflect disappointment the RBNZ didn’t bring forward the expected timing of its first rate hike.

It’s clearly in no rush to hike rates until its confident enough the economy is strong enough to both keep employment at maximum levels and inflation at the midpoint of its target.

Orr will speak at at press conference form 10am in Wellington (8am AEDT).

The full monetary policy statement can be accessed here.