8 Feb 2018

Reserve Bank keeps cash rate at 1.75%

10:49 am on 8 February 2018

The Reserve Bank has held its cash rate unchanged as expected amid subdued inflation and moderate economic growth.

The Reserve Bank of New Zealand

Photo: RNZ / Alexander Robertson

The Official Cash Rate (OCR) was held at a record low 1.75 percent, where it has been for more than a year.

The Reserve Bank's acting governor, Grant Spencer, said in the short term it expected the economy to be weaker but it should pick up in the medium term.

"GDP growth eased over the second half of 2017 but is expected to strengthen, driven by accommodative monetary policy, a high terms of trade, government spending and population growth.

"Labour market conditions continue to tighten," he said in a statement.

"Compared to the November statement, the growth profile is weaker in the near term but stronger in the medium term."

He said the RBNZ had also scaled back its estimates of the impact of the new government's policies, although the KiwiBuild housing programme is expected to boost activity from 2019.

Mr Spencer noted the housing market had also picked up pace in recent months, while food and oil prices have been higher the cost of imported goods has been lower because of the higher New Zealand dollar, leaving overall inflation under control.

"Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly," Mr Spencer said.

Economists expect the next move in interest rates to be a rise around mid-2019.

"A clear theme of inflation remaining lower for longer is emerging. The risk is the RBNZ can afford to wait longer until lifting the OCR," said ASB's chief economist Nick Tuffley.

A new governor, Adrian Orr, will take over at the end of March and the government intends to give him an instruction to promote full employment as well as keep inflation under control.

The New Zealand dollar fell more than a third of a cent after the RBNZ statement, as financial markets scaled back the chances of a rise in interest rates anytime soon.