U2 perform at Mt Smart Stadium on November 08, 2019 in Auckland, New Zealand. (Photo by Phil Walter/Getty Images) 
“We still think the Bank remains too optimistic on the prospects for growth in New Zealand,” said Ben Udy, an economist at Capital Economics in Singapore. While Udy correctly predicted the RBNZ would hold rates today, he said he expects it to cut twice more next year to 0.5%.
The New Zealand dollar jumped three-quarters of a U.S. cent after the surprise announcement. It bought 64.09 cents at 2:33 p.m. in Wellington, up from 63.35 cents immediately before the statement. Two-year swap rates rose 21 basis points to 1.25% and the 10-year bond yield gained 17.5 points to 1.54%.
New projections for the cash rate continue to signal some chance of another rate cut next year, according to the central bank’s policy statement. They show the average OCR dropping to 0.90% in the first quarter of 2020.
The RBNZ’s monetary policy committee’s decision was reached by consensus, according to a record of the meeting also published Wednesday.
Cut Debated
“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.”
When the RBNZ cut rates in May, it became the first central bank in the developed world to embark on a new easing cycle. While others soon followed suit, recent pauses from the U.S. Federal Reserve and Australia’s central bank suggest policymakers want to assess the impact of cuts to date before adding further stimulus.
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 fears of the impact of a trade war between the U.S. and China on global growth have hurt manufacturing and exports.
The RBNZ today 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 lifting to 2.7% by early 2021.
“We expect economic growth to remain subdued over the remainder of the calendar year,” it 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.”