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New Zealand Monetary Policy November 2019

New Zealand: RBNZ on hold in November

On 13 November, the Reserve Bank of New Zealand (RBNZ) kept the official cash rate (OCR) unchanged, after having unexpectedly cut the rate by 50 basis points in August. Therefore, the OCB stays at an all-time low of 1.00%. The Bank also indicated the possibility of further easing monetary policy ahead amid weak demand conditions and a subdued inflationary environment. The move surprised markets, which had expected a 25-point cut, and boosted the kiwi, which recorded its biggest daily gain against the USD in a year.

Although the RBNZ acknowledged that softness in economic activity carried over into the second half of the year, it also noted that the monetary policy transmission mechanism is gradually translating into lower lending rates and weakening the exchange rate, thus prompting the Bank to stand pat. Moreover, inflation remained within the target range of 1.0%–3.0% in Q3, and the Bank expects it to rise to the band’s midpoint as wage growth strengthens and non-tradable goods inflation increases following the latest policy cut, while employment continues to hover around its maximum sustainable level. And while downbeat business sentiment and weak global growth point to a subdued H2, the economy should strengthen ahead thanks to low interest rates and some fiscal stimulus; that said, risks stemming from trade tensions remain high.

In its forward-looking guidance, the RBNZ stated that it considers current loose monetary policy conditions to be providing adequate support to domestic demand but also signaled the possibility of further rate cuts. Reigniting trade tensions, weakening global growth and the dovish stance of major central banks could prompt the RBNZ to further cut rates in the near future.

The next monetary policy meeting is scheduled for 12 February.

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