February 11, 2019 / 4:01 AM / 2 months ago

New Zealand central bank to hold rates at record low as global risks grow

WELLINGTON (Reuters) - New Zealand’s central bank is expected to leave interest rates unchanged this week but may adopt a more dovish tone and cut forecasts, in line with other major central banks as global economic headwinds add risks to the outlook.

A security guard stands in the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand, July 3, 2017. REUTERS/David Gray/Files

In a Reuters poll, 16 economists unanimously expect the Reserve Bank of New Zealand (RBNZ) to keep rates on hold at a record low of 1.75 percent for the fifteenth time in a row, at its first monetary policy announcement of the year on Wednesday afternoon.

Six of the 15 economists who made predictions beyond this week’s decision expected at least one hike to the official cash rate (OCR) by the end of the year, though one expected a cut to 1.50 percent.

The bank was expected to become more dovish in its tone due to a slew of economic indicators suggesting softer growth and the risk of spillover from Brexit and the ongoing trade tensions between the United States and China, New Zealand’s key trading partner.

“Inflation pressures have lifted, and business confidence is recovering, but the increased downside risks to the growth outlook means the Reserve Bank is likely to remain cautious as to when it starts to normalise monetary policy by lifting interest rates,” said Christina Leung, Principal Economist at the New Zealand Institute of Economic Research (NZIER).

“There remains the potential for an OCR cut should economic conditions deteriorate.”

Economic growth slumped to 0.3 percent in the third quarter, its slowest pace in nearly five years and missing the bank’s forecast of 0.7 percent. Official labour statistics released last week showed a surprise pick-up in the unemployment rate in the final three months of 2018.

Elsewhere, several closely-watched central banks, including the Bank of England and the Reserve Bank of Australia, have already downgraded growth forecasts in recent weeks.

The revisions follow the U.S. Federal Reserve’s dovish shift last month, seen by markets as a signal that its three-year-drive to tighten monetary policy may be at an end amid global headwinds and budget and trade tensions.

“Global data has struck a softer note and risks have increased sharply, with central banks turning more dovish in concert,” said economists at ANZ Bank, which is forecasting the RBNZ will slash rates to 1 percent by mid-2020.

“We expect the RBNZ will join the chorus this week, employing a similarly dovish tone that echoes the tenor of other central banks and market pricing, which has moved to price in a good chance of a rate cut, reflecting the changing balance of risks,” they added.

Reporting by Charlotte Greenfield; Editing by Sam Holmes

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