22 Jun 2017

Reserve Bank holds OCR at 1.75%

10:03 am on 22 June 2017

The Reserve Bank has held the Official Cash Rate at its record low of 1.75 percent, as expected.

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Photo: 123rf

Reserve Bank governor Graeme Wheeler said "numerous uncertainties" remained in the economy.

"Global economic growth has increased and become more broad-based. However, major challenges remain with ongoing surplus capacity and extensive political uncertainty."

He said GDP growth in the March quarter was lower than expected, with weaker export volumes and residential construction, partially offset by stronger consumption.

"Nevertheless, the growth outlook remains positive, supported by accommodative monetary policy, strong population growth, and high terms of trade. Recent changes announced in Budget 2017 should support the outlook for growth."

He credited loan-to-value ratio restrictions and tighter lending conditions for a slowdown in house price inflation, particularly in Auckland.

"This moderation is projected to continue, although there is a risk of resurgence given the ongoing imbalance between supply and demand."

Mr Wheeler said the increase in headline inflation in the March quarter was expected to be temporary.

He said overall inflation should remain around the 2 percent mark.

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

Economists said the statement was largely as expected and similar in wording to the May statement.

"The RBNZ today maintained a very neutral tone, giving themselves plenty of time to see how economic data progresses over the year ahead," said KiwiBank senior economist Zoe Wallis.

In May the RBNZ was forecasting its cash rate would stay on hold until the end of 2019 at the earliest, but most analysts expect it will be forced to move well before that, probably in the second half of next year.

Ms Wallis expected gradual OCR hikes from November 2018.

"We will still see a rate hike earlier than the RBNZ's projections suggest, as inflation pressure builds and major global central banks continue to move toward tighter monetary policy settings."

The New Zealand dollar gained about a quarter of a cent against the US dollar, to 72.5 cents, because the RBNZ's statement didn't attack the currency's recent gains.

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