28 Apr 2016

Reserve Bank holds OCR steady, hints at more cuts

1:50 pm on 28 April 2016

The Reserve Bank has held its Official Cash Rate (OCR) steady at a record low 2.25 percent, but left the door open for further cuts.

Analysts and financial markets had expected no change to the benchmark rate following last month's surprise reduction.

Reserve Bank of New Zealand

Photo: RNZ / Alexander Robertson

"We expect inflation to strengthen as the effects of low oil prices drop out and as capacity pressures gradually build," Reserve Bank governor Graeme Wheeler said.

"Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range."

The Kiwi jumped 0.75 of a cent from 68.22 US cents to 69.09 US cents following the decision, and peaked at 69.4 US cents before easing slightly.

Mr Wheeler said the global economic outlook had worsened, partly because of the slowdown in China and weak commodity prices.

But he said the domestic economy was performing strongly on the back of strong migration, construction activity, tourism and low interest rates.

The dollar remained an irritant though.

Reserve Bank Governor Graeme Wheeler speaking to media after the announcement.

Reserve Bank Governor Graeme Wheeler Photo: RBNZ

"The exchange rate remains higher than appropriate given New Zealand's low commodity export prices. A lower New Zealand dollar is desirable to boost tradables inflation and assist the tradables sector," Mr Wheeler said.

Mr Wheeler said among the main risks to the economy were the weak dairy market, the hot housing market and weak inflation expectations.

However, some economists said the Reserve Bank's tone indicated a softer bias to cutting rates in the future.

"The guidance on further rate cuts was less emphatic than we were expecting," Westpac senior economist Michael Gordon said.

"On balance, we still expect another OCR cut in June - indeed, the market's response actually increases the pressure on the RBNZ to do so. But today's statement suggests that the RBNZ is planning to call time on the easing cycle in the June MPS [Monetary Policy Statement]," Mr Gordon said.

ANZ Bank chief economist Cameron Bagrie said a June cut remained open, but the odds of it happening had fallen.

"[A June OCR cut] remains our forecast for now. But we see this as very much a line-ball call."

An economist at Westpac Bank Michael Gordon said the end of interest rates cuts by the Reserve Bank appeared to be in sight.

He said with the Reserve Bank talking about a strong domestic economy, the prospect of rising inflation and pressures in the housing market, it sounded increasingly likely that 2 percent would be the low point for rates.

It would take fresh bad news, such as a shock to the global economy, for the Reserve Bank to consider going below 2 percent, he said.

Earlier this morning, the United States Federal Reserve kept interest rates steady at close to zero, but left the door open to a rise in June.

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