Article Highlights

  • RBNZ tone slightly more dovish than in May statement
  • Recent weaker GDP implies more spare capacity -RBNZ
  • RNBZ says global outlook tempered by trade tensions
  • Some analysts say rate cut cannot be ruled out
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New Zealand’s central bank kept interest rates steady on Thursday and warned of rising risks to the outlook as growth slows and global trade frictions escalate, signaling its resolve to maintain record-low rates for some time.

The dovish tone of the Reserve Bank of New Zealand’s (RBNZ) statement, which nodded to a recent run of weak data, reaffirmed market expectations that no rate hike was on the near-term horizon and even led some analysts to project a slim but possible chance of a rate cut.

The central bank held the official cash rate at 1.75 percent for the 11th straight review as it works to boost inflation to 2 percent, the center of its target band.

The statement from RBNZ Governor Adrian Orr had a slightly more dovish tone than at the meeting in May, adding warnings over recent weakness in economic growth and the potential fallout from escalating trade tensions among major economies.

The recent weaker gross domestic product (GDP) outturn implies marginally more spare capacity in the economy than we anticipated,” Orr said.

Trade tensions in some major economies also “tempered slightly” prospects that robust global demand will underpin New Zealand’s economy, the central bank chief said in the RBNZ’s strongest warning to date of the harm such frictions could inflict on trade and business activity.

What we’ve got in our judgment is slightly on the dovish side,” said Nick Tuffley, chief economist at ASB Bank.

If we don’t see any material improvement in business confidence or we see a lot more impact coming through from global trade tensions, you can’t rule out a cut either.

The RBNZ said policy will remain expansionary “for a considerable period of time,” underscoring a dominant market view there will be no rate hike until mid-2019 at the earliest.

Analysts say the changes to the statement did not alter the thrust of the RBNZ’s policy intentions.

But the tweak in wording underscored Orr’s intent to break from the ambiguous messaging favored by many of his counterparts, and respond more flexibly to developments in the economy to make the bank’s communication easier to grasp for the public.

The RBNZ said later on Thursday that it will change the day and time of its rate announcements, a move that lays the groundwork for a shift in how it decides policy.

This change helps position the Reserve Bank for the upcoming shift to a decision-making committee structure,” the bank said in an emailed statement.

Under the expected change in the decision-making structure, a committee of central bank officials and external experts would vote on policy decisions – a major change from the present, in which only the governor has that power.


Major central banks have struggled with soft inflation even as their economies strengthened on robust global trade, now under threat from trade frictions triggered by U.S. President Donald Trump’s “America First” policies.

New Zealand is no exception with headline annual inflation having slowed to 1.1 percent in the first quarter, just off the bottom of the RBNZ’s target range of 1 to 3 percent.

Economic growth slowed to 0.5 percent in the first three months of this year, undershooting the RBNZ’s forecast. A survey on Wednesday showed business confidence sank to a seven-month low in June, a sign the economy may be in for a soft patch.

We are now worried that growth could slow by more than we have assumed,” Capital Economics said, projecting that rates won’t rise until mid-2020.

Analysts at ANZ expect a rate hike in November next year but warn that “a lot can happen between now and then.”

We see risks to domestic inflation as skewed to the downside, and we could equally argue for a flat track. And if conditions deteriorated significantly, a cut could eventuate quite rapidly,” they said.