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No reduction of the OCR

Despite the diversity of opinions of whether to cut or not to cut the Official Cash Rate to 0.25%, the Reserve Bank unexpectedly held interest rates unchanged at 1.00% defying the broad market expectations that it would be dropped to a new low of 0.75%.

The Reserve Bank has thrown up yet another surprise in its latest decision on interest rates – this time by not doing anything.

RBNZ justified policy to hold rates stating that economic developments since August do not warrant a change to the already stimulatory monetary setting at this time. In August the RBNZ shocked the markets with a double-cut from 1.5% to 1%, which in turn, could be the reason why the central bank kept rates on hold. The Monetary Policy Committee’s August’s double rates cut resulted in the improvement in recent data, noting that the increases in wage growth and non-tradable inflation were a result of previous monetary stimulus.

Key Points

The following are the key points why the RBNZ’s Monetary Policy Committee held its interest rate unchanged today.

Firstly, employment remains near its maximum sustainable level and underlying inflation is close to but below 2 percent. The MPC expects the labor market and capacity pressure to ease in the near term.

Secondly, GDP growth has continued to slow in 2019. Business investment and household spending have been soft. The current slowdown in economic growth is expected to reduce capacity pressure and employment growth over the next year. Annual GDP growth fell to 2.1 percent in the June 2019 quarter from 3.2 percent in the same quarter last year. The MPC expects growth to ease slightly further over the second half of 2019.

Thirdly, a slowdown in global economic growth has also dampened domestic growth. Higher tariffs, declining global trade flows, and ongoing policy uncertainty have suppressed global demand. Central banks have eased monetary policy to support their economies.

Fourthly, the reduction in the OCR over the past six months has seen lending and deposit interest rates fall. The recent pick-up in house price inflation and depreciation of the New Zealand dollar exchange rate are expected to contribute to higher growth over the next year. Besides, higher government spending provides support to GDP growth over the same period.

And, fifthly, accommodative monetary policy remains necessary to achieve RBNZ’s inflation and employment objectives.

The Future

Looking forward, given the second surprise of the RBNZ today, from the first surprise in August. the market should not be disappointed by the central bank’s move to hold rate unchanged for the last RBNZ monetary policy meeting for the year 2019. Why? To take from the mouth of the central bank’s MPC, RBNZ says it will add additional stimulus if needed with forecasts showing a chance of a rate cut in 2020 and that would happen in the next monetary policy meeting in February 2020. Interest rates expected to remain low for a prolonged period. Economic growth remaining somewhat subdued through year-end and Q4 GDP forecasts cut from 0.7% to 0.6%.

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The Official Cash Rate (OCR) explained
The Official Cash Rate (OCR) explained

What is the OCR? The OCR is an interest rate set by the Reserve Bank of New Zealand which defines...

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