Article Highlights

  • Rates kept at 1.75 pct, as expected
  • RBNZ flags construction sector headwinds as drag on growth
  • Election kingmaker Winston Peters accuses bank of 'complacency'
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New Zealand’s central bank on Thursday hinted at a lower growth outlook as a long construction boom loses momentum and against the backdrop of political uncertainty from an inconclusive national election.

A weekend vote left no single party with a majority, forcing the major parties to court New Zealand First’s controversial and outspoken leader Winston Peters to be able to gain enough seats in parliament to form a government.

Peters, who favors greater central bank intervention in currency markets, seized on Thursday’s cash rate decision to warn about central bank complacency over the country’s economic vulnerabilities.

The Reserve Bank of New Zealand (RBNZ) kept interest rates at record lows of 1.75 percent for a sixth consecutive meeting on Thursday and said monetary policy would stay accommodative.

The most important development was a downgrade to the RBNZ’s growth outlook,” Westpac Chief Economist Dominick Stephens said in a research note.

Grant Spencer, the RBNZ’s acting governor, said that New Zealand’s economic growth, previously the envy of the developed world, was encountering headwinds from severe bottlenecks in the construction sector.

The RBNZ suggested that gross domestic product (GDP) would likely “maintain its current pace going forward,” abandoning its more optimistic comments in August that “growth is expected to improve.” If quarterly GDP growth were to continue at the 0.8 percent rate posted in the second quarter, annual GDP growth would be 3.2 percent by June 2018 – well below the 3.8 percent the RBNZ forecast in August.

Annual GDP hovered around 2.5 percent in the first two quarters of 2017 as the construction sector faltered.

Though demand for building work to house its fast-growing population and rebuild earthquake-ravaged regions continued, the construction sector was mired in labor shortages and spiraling costs.

New Zealand First’s role in either a center-left or a center-right government could also dampen the country’s growth outlook, analysts said.

The need for the main parties to pander to NZ First to form a government suggests that growth could slow sooner as tighter immigration and housing policies are agreed,” said Paul Dales, economist at Capital Economics.

Peters was himself quick to criticize the bank for not going far enough.

Today’s OCR announcement maintains the tone of complacency on New Zealand’s economic outlook,” he wrote on Twitter, referring to the official cash rate.

“Beneath the veneer of stability large risks are lurking in the global economy,” he added in a statement on his party’s website.

There are some concerns that a change of government could spell a change in the independent central bank’s approach to monetary policy, with Labour also pushing to expand the bank’s mandate to include employment.

The new note of economic caution from the RBNZ left the local dollar idling at $0.7225, and well short of last week’s peak at $0.7435.

The bank said a further fall in the currency would help stoke inflation and rebalance the economy.