NZ dollar's 'savage' fall as Reserve Bank adopts gloomy outlook

The Reserve Bank has kept its official cash rate (OCR) on hold at 1.75 per cent, as expected, but said the next move is likely to be down.

At the last OCR review in February, the bank said the next move could be up or down.

But today, the bank said: "Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down."

ASB chief economist Nick Tuffley said the bank's next move could be as early as May.

The New Zealand dollar fell by about one us cent to US68.16c from just over US69c before the 2pm announcement.

Jeremy Couchman, senior economist at Kiwibank, said:

"The market reaction was savage."

Reserve Bank said employment was near its maximum sustainable level.

"However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy," it said in a statement.

The global economic outlook had continued to weaken, in particular amongst some of our key trading partners, including Australia, Europe, and China.

"This weaker outlook has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar," it said.

Domestic growth slowed in 2018, with softness in the housing market and weak business investment contributing.

"We expect ongoing low interest rates, and increased Government spending and investment, to support economic growth over 2019.

"Low interest rates, and continued employment growth, should support household spending and business investment. Government spending on infrastructure, housing, and transfer payments also supports domestic demand," the bank said.

As capacity pressures built, consumer price inflation was expected to rise to around the mid-point of the bank's target range at 2 per cent.

The bank said the balance of risks to its outlook had shifted to the downside.

"The risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending," it said.

"On the upside, inflation could rise faster if firms pass on cost increases to prices to a greater extent."

ASB's Tuffley said a key uncertainty is whether 2019 growth will pick up after a patchy 2018.

"There are still a number of supports for the economy," he said.

"But we have mounting concern that growth will not pick up sufficiently quickly to drive inflation pressures up, particularly as business confidence started the year on a softer tone," Tuffley said.

"If the economy doesn't start showing greater signs of life soon, then the Reserve Bank could conceivably cut as early as May," he said.

Upcoming business confidence surveys will be very important between now and the May's monetary policy statement from the Reserve Bank, he said.

The Reserve Bank, in its statement, said it would keep the OCR at an expansionary level "for a considerable period" to contribute to maximising sustainable employment, and maintaining low and stable inflation.