New Zealand’s central bank keeps key interest rates steady

WELLINGTON: New Zealand’s central bank held key interest rates steady on Wednesday but said further cuts to borrowing costs may be needed given growing economic risks at home and abroad.

The Reserve Bank of New Zealand (RBNZ) kept the official cash rate (OCR) at a record low of 1.50%, as expected, and in a strikingly dovish statement warned that a global slowdown is hurting the domestic economy amid intensifying trade risks.

“The global economic outlook has weakened, and downside risks related to trade activity have intensified,” the RBNZ said.

“Given the downside risks around the employment and inflation outlook, a lower OCR may be needed,” it said, having lowered the cash rate by 25 basis points at the last meeting in May.

The dovish statement mirrored a recent shift by global central banks to ease monetary policy to combat rising economic risks as a year-long Sino-US tariff war dents trade, corporate profits and overall growth.

“Given the tone of this statement from the RBNZ, we remain of the view that the RBNZ will most likely cut the OCR in August,” said Westpac Chief Economist Dominick Stephens.

“The repeated comment that a lower OCR may be needed is blunter than the language used in March, which was followed by a cut in May,” he said.

Markets imply around a 63% chance of a reduction to 1.25% at the central bank’s next meeting on August 7, and are wagering heavily on 1% by year end.

Minutes of the RBNZ review released along with the statement showed policymakers discussed whether to cut at the meeting and decided that more monetary easing was “likely to be necessary” over time.

Last week both the US Federal Reserve and the European Central Bank reversed course and opened the door to new stimulus, while the Reserve Bank of Australia (RBA) has said it’s likely to ease again to follow up from its cut earlier this month.

The New Zealand dollar was largely unchanged, rising just 0.2% to $0.6646 after the rates decision.

In its statement the RBNZ said it expected inflation to rise to the 2 per cent mid-point of its target range, and employment to remain near its maximum sustainable level, but didn’t give a time frame.

Sino-US trade tensions as well as softening domestic housing and immigration growth have put pressure on New Zealand’s economy.

A slowdown in China, New Zealand’s biggest export market, is a key concern for policymakers, just as it is for many other nations whose economic fortunes are closely linked to the Asian giant.

Dairy exports, particularly to China, helped push New Zealand’s exports higher in May.

“The weaker global economy is affecting New Zealand through a range of trade, financial, and confidence channels,” the central bank said.

It said the softer house prices and subdued business sentiment continue to dampen domestic spending.

Indeed, while gross domestic product growth figures released last week topped expectations, the broad picture highlighted a soft underbelly.

The Treasury department last month cut its GDP growth forecast to 2.1% for the 12-months ending June 30, from the 2.9% expansion predicted in December.

“Upside risks to inflation and employment are becoming few and far between,” ANZ analysts said in a note to clients, tipping rate cuts in August and November.

New Zealand on May 30 unveiled a $2.5 billion spending package under its ‘wellbeing’ budget, prioritising mental health and alleviating child poverty, as it rolled out a new approach to budgeting that goes beyond measuring just economic growth.

Much of the excitement around the budget, however, was dampened amid a national furore over hacking accusations after details were leaked ahead of its release, with the opposition calling for heads to roll for the blunder.

“Today’s budget shows you can be both economically responsible and kind,” Prime Minister Jacinda Ardern said after the budget was released.

The budget increases the annual operating allowance for new spending to NZ$3.8 billion ($2.48 billion) per year over the four-year forecast period, from a forecast NZ$2.4 billion in the previous budget.

About NZ$1.9 billion was slated for mental health services and NZ$1.1 billion towards reducing child poverty over that period. The Labour-led government also allocated funds for tackling domestic violence, and for infrastructure projects like rail, hospitals and schools.

“We are measuring our country’s success differently,” said Finance minister Grant Robertson. “We are not just relying on gross domestic product (GDP), but also how we are improving the wellbeing of our people, protecting the environment and strengthening of our communities.”

The operating allowance for budget 2020 has also increased to $3.0 billion from $2.4 billion.

The national rail service, KiwiRail, was given a NZ$1 billion boost.

The Treasury department, however, downgraded its gross domestic product forecasts to 2.1% in the year ending June 30, 2019, compared to 2.9% predicted in December, hurt by a cooling global economy and slackening domestic consumption.

GDP was forecast at 3.2% in fiscal 2020, and was seen averaging at about 2.6 per cent over the forecast four-year period.

Net debt was also forecast to rise slightly above 20% of the GDP, before dropping to 19.9 per cent in 2022.

Robertson warned the economy faces continuing risks from the US-China trade disputes and Britain’s exit from the European Union.

The budget forecast an operating surplus of NZ$3.5 billion for the year ending June, up from NZ$1.7 billion forecast in December.

Despite enjoying a ‘rockstar’ economy for years, some New Zealanders have felt left behind due to the rising inequality.

Ardern, the popular 38-year-old Prime Minister, came to power in 2017 with an agenda of social justice and promising to make the economy “work for all New Zealanders”.

Some questioned whether the budget had lived up to the government’s stated goals to transform the economy and pointed out that the spending increase was still relatively modest as the government stuck firmly to its targets of paying down debt.

Referring to the leak of budget details, opposition National party called it a “botched budget”, and questioned allocation for defence that do not come under the wellbeing approach.

Reuters