NZ Down Sharply After RBNZ Paints Gloomy Picture

The New Zealand Dollar is trading sharply lower on Wednesday after the Reserve Bank held its official cash rate (OCR) at 1.75 percent as expected, but said its next move is likely to be down. This marked a major change from its last meeting in February when the RBNZ said the next move could be up or down.

At 02:05 GMT, the NZD/USD is trading .6809, down 0.0099 or -1.44%.

Next Move in OCR is Down

The central bank backed its view on the direction of interest rates by saying, “Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down.”

Low Inflation Means RBNZ Will Be Supportive

Furthermore, RBNZ policymakers said employment was near its maximum sustainable level. “However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy.”

Central bank policymakers also addressed consumer inflation, saying, as capacity pressures build, consumer price inflation was expected to rise to around the mid-point of the bank’s target range at 2 percent.

Weakening Global Economy

Policymakers also reacted to signs of a global economic slowdown especially among some of New Zealand’s biggest trading partners including Australia, Europe, and China. “The weaker outlook has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand Dollar, the RBNZ said.

Support Coming from Low Rates, Government Spending, Investment

The RBNZ also touched on domestic growth issues, saying it slowed in 2018, with softness in the housing market and weak business investment contributing. “We expect ongoing low interest rates, and increased government spending and investment, to support economic growth over 2019.”

“Low interest rates, continued employment growth, should support household spending and business investment. Government spending on infrastructure, housing, and transfer payments also supports domestic demand,” the bank said.

Balance of Risks Shifts to Downside

The RBNZ also said that the balance of risks to its outlook had shifted to the downside. “Risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending. On the upside, inflation could rise faster if firms pass on cost increases to prices to a greater extent.”

OCR Continues at Expansionary Level

Finally, RBNZ policymakers decided that the best move at this time would be to keep the OCR at an expansionary level “for a considerable period” to contribute to maximizing suitable employment and maintaining low and stable inflation.