Reserve Bank predicts NZ economy will pick up, despite global concerns

Wednesday, 13 February 2019

The Reserve Bank has trimmed its growth forecasts as it warned of a global slowdown, but is still expecting the economy to grow solidly this year.

On Wednesday the bank left the official cash rate (OCR) unchanged at 1.75 per cent and indicated the benchmark rate was likely to stay at this level into 2021, even longer than previously indicated.

Updated growth forecasts show the economy is expected to grow at around 3 per cent in 2019, faster than in the second half of 2018 but below what it had forecast back in December.

Despite a weaker outlook, and an indication that the next move for interest rates could be down, the New Zealand jumped more than half a cent against the US dollar.

* Reserve Bank interest rate call sends NZ dollar tumbling

* Reserve Bank says the benchmark official cash rate will stay at 1.75 per cent until at least 2020**

'Trading-partner growth is expected to further moderate in 2019 and global commodity prices have already softened, reducing the tailwind that New Zealand economic activity has benefited from,' Reserve Bank governor Adrian Orr said.

'The risk of a sharper downturn in trading-partner growth has also heightened over recent months.'

While overseas factors were weakening, Orr said low interest rates and strong government spending were expected to 'support a pick-up in New Zealand's [economic] growth over 2019'.

The Reserve Bank's forecasts predicted that in real terms - meaning excluding general inflation - house prices were expected to be flat over the next few years.

The Auckland housing market was 'without doubt negative' while house prices in some markets remained strong, Orr said.

A sharp fall in prices was unlikely. 'There are so many factors that are supporting that asset class at the moment,' Orr said.

Previous interest rate decisions have traditionally been announced early on Thursday morning, however the bank released the monetary policy on a Wednesday afternoon, in preparation of moving to a committee structure where outside appointees would vote on interest rate decisions.

'Reality check'

ANZ chief economist Sharon Zollner said despite the downward revisions in growth numbers, 'we continue to see [risks] as skewed to the downside' meaning growth was more likely to be lower than the Reserve Bank forecast than higher.

Late in 2018, the bank announced that it expected the OCR to eventually be cut to 1 per cent.

'In our view, growth this year will fail to accelerate to the degree that the Reserve Bank forecasts, with it gradually becoming clear that more monetary stimulus will be needed to generate a sustained lift in inflation,' Zollner said.

National finance spokeswoman Amy Adams said the Reserve Bank's forecasts were a reality check for the Government, with growth generally trimmed in the coming years.

'Forecast growth has either stalled or been downgraded in every quarter for the next three years. The central bank's reality check on growth comes just 24 hours after the Prime Minister gushed that the economy 'is performing above expectations'.'

ASB chief economist Nick Tuffley said the statement was slightly more cautious than the Reserve Bank's last forecasts in December, but still predicting the economy would pick up speed this year.

If this momentum did not eventuate, Tuffley said there was a chance of interest rate cuts.

'The strength (or otherwise) of the economy this year will be pivotal to whether the [Reserve Bank] remain on hold or does indeed cut the OCR (as market pricing has factored in).'