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New Zealand Monetary Policy May 2019

New Zealand: RBNZ lowers the OCR to a new record low

On 8 May, the Reserve Bank of New Zealand (RBNZ) lowered the official cash rate (OCR) by 25 basis points to an all-time low of 1.50%. The move was in line with analysts’ expectations, as the board had grown increasingly dovish since the start of the year on concerns over a subdued inflationary outlook and a slowdown in domestic demand.

In its communiqué, the RBNZ pointed out that inflation remains stuck in the lower bound of the 1.0%–3.0% target band, owing to weaker spending from households and businesses. Notably, continued softness in the housing market has taken its toll on consumption. Moreover, negative business sentiment and narrow profits have dissuaded firms from expanding capacity via new investment. To that effect, the employment outlook for the near-term tilted to the downside, prompting the RBNZ to cut the OCR in order to spur private consumption and fixed investment.

In its forward-looking guidance, the RBNZ left the door open to further rate cuts. Although the lower OCR is seen supporting domestic activity in the short-term, the external backdrop is increasingly uncertain. Intensifying trade tensions between the U.S. and China could hinder export growth, eventually curbing price pressures, while RBNZ projections show the OCR averaging 1.4% in 2020.

Commenting on the RBNZ’s decision, Tuuli McCully, head of Asia-Pacific economics at Scotiabank, noted:

“The decision to ease monetary policy reflects rising concerns regarding the health of the economy. The MPC noted that domestic economic growth momentum has continued to slow, while the external backdrop—driven by persistent trade concerns—remains uncertain. Despite the fact that New Zealand’s labour market is currently near its maximum employment level, the challenging economic environment will likely adversely impact employment conditions over the coming months; accordingly, the MPC needed to inject further monetary stimulus into the economy in order to continue meeting the new maximum employment objective.”

The next monetary policy meeting is scheduled for 26 June.

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