(Bloomberg) -- New Zealand’s central bank left interest rates unchanged -- defying widespread expectations of a cut -- saying there are signs the domestic economy will stop slowing and that inflation will pick up. The local currency jumped.
“Economic developments since the August Statement do not warrant a change to the already stimulatory monetary setting at this time,” the Reserve Bank said Wednesday after holding the official cash rate at a record-low 1%. “We will add further monetary stimulus if needed.”
The RBNZ’s surprise move Wednesday adds to evidence of a global policy shift after the Federal Reserve signaled a pause in late October and Australia’s central bank held steady last week; all three banks have cut rates by 75 basis points this year. New Zealand was first in the mini-easing cycle when it began lowering rates in May, and said today it wants to assess the impact of earlier reductions before adding further stimulus.
“We still think the bank remains too optimistic on the prospects for growth,” said Ben Udy, an economist at Capital Economics in Singapore. Udy correctly predicted the RBNZ would hold rates today, and expects the central bank to cut twice more next year to 0.5%.
The New Zealand dollar jumped three quarters of a U.S. cent after the announcement. It bought 64 cents at 3:38 p.m. in Wellington, up from 63.35 cents before the statement. Two-year swap rates rose as much as 21 basis points and are currently trading 18 basis points higher at 1.22%. The 10-year bond yield gained as much as 18 basis points and is currently 13 basis points higher at 1.49%.
New projections for the overnight cash rate continue to signal some chance of a cut next year, according to the central bank’s policy statement. The projections show the average OCR dropping to 0.90% in the first quarter of 2020.
The monetary policy committee’s decision was reached by consensus, according to a record of the meeting also published Wednesday.
“The committee debated the costs and benefits of keeping the OCR at 1.0% versus reducing it to 0.75%,” it said. “The committee agreed that both actions were broadly consistent with the current OCR projection. The committee agreed that the reduction in the OCR over the past year was transmitting through the economy and that it would take time to have its full effect.”
The RBNZ is betting that the easing it has delivered this year, including a surprise 50-point cut in August, will revive economic growth in 2020, helping inflation return to the midpoint of its 1%-3% target. Most economists were forecasting a cut today and had anticipated more easing next year, after inflation expectations dropped and the labor market slowed.
“Today’s decision shows that the RBNZ is not afraid to stare down financial markets,” said Dominick Stephens, New Zealand chief economist at Westpac Banking Corp. in Auckland. “The RBNZ will act on its assessment of the data rather than following markets.”
New Zealand’s economy has cooled, with annual growth slowing to 2.1% in the second quarter from 3.2% a year earlier. Subdued business confidence has damped hiring and investment, while manufacturing and exports have suffered as the U.S.-China trade war stokes concerns about global growth.
The RBNZ cut its forecasts for economic growth, saying it now expects gross domestic product to increase 2.2% in the year through March 2020, compared to 2.7% previously. It sees growth rising to 2.7% by early 2021.
“We expect economic growth to remain subdued over the remainder of the calendar year,” the bank said. Still, “domestic economic activity is expected to increase during 2020 supported by low interest rates, higher wage growth and increased government spending and investment. The low level of the OCR has flowed through to lower lending rates more generally, which support spending and investment.”
Employment remains around its maximum sustainable level, the RBNZ said. A report last week showed the jobless rate rose to 4.2% in the third quarter while annual employment growth was the weakest since 2013.
The central bank raised its near-term forecasts for annual inflation, which it now expects will reach 2.1% by the first quarter of 2020 before edging back to 1.7% in early 2021.
“Interest rates will need to remain at low levels for a prolonged period to ensure inflation reaches the mid-point of our target range,” the RBNZ said. “We will continue to monitor economic developments and remain prepared to act as required.”
(Updates with comment from economist in 10th paragraph.)
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