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MNI: RBNZ Cuts Key Rate To 1.5%: Text

MNI (London)
     WELLINGTON (MNI) - The Reserve Bank of New Zealand cut the key cash rate 25
bps to 1.5 following the May 8 meeting.
     The statement of Governor Adrian Orr's text follows:
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     Statement by Reserve Bank Governor Adrian Orr:
     Tena koutou katoa, welcome all.
     The Official Cash Rate (OCR) has been reduced to 1.5 percent.
     The Monetary Policy Committee decided a lower OCR is necessary to support
the outlook for employment and inflation consistent with its policy remit.
     Global economic growth has slowed since mid-2018, easing demand for New
Zealand's goods and services. This lower global growth has prompted foreign
central banks to ease their monetary policy stances, supporting growth
prospects.
     However, there is uncertainty about the global economic outlook. Trade
concerns remain, while some other indicators suggest trading-partner growth is
stabilising.
     Domestic growth slowed from the second half of 2018. Reduced population
growth through lower net immigration, and continuing house price softness in
some areas, has tempered the growth in household spending. Ongoing low business
sentiment, tighter profit margins, and competition for resources has restrained
investment.
     Employment is near its maximum sustainable level. However, the outlook for
employment growth is more subdued and capacity pressure is expected to ease
slightly in 2019. Consequently, inflationary pressure is projected to rise only
slowly.
     Given this employment and inflation outlook, a lower OCR now is most
consistent with achieving our objectives and provides a more balanced outlook
for interest rates.
     Meitaki, thanks.
     Record of Meeting The Monetary Policy Committee agreed on the economic
projections outlined in the May 2019 Statement in order to provide a sound basis
on which to form its OCR decision.
     The Committee noted that inflation is currently slightly below the
mid-point of the inflation target, and that employment is broadly at the
targeted maximum sustainable level. However, the members agreed that given the
recent weaker domestic spending, and projected ongoing growth and employment
headwinds, there was a need for further monetary stimulus to meet its
objectives.
     The Committee agreed that the risks to achieving its consumer price
inflation and maximum sustainable employment objectives were broadly balanced
around the projection. Possible alternative outcomes were noted on the upside
and downside.
     A key downside risk relating to the growth projections was a larger than
anticipated slowdown in global economic growth, particularly in China and
Australia, New Zealand's largest trading partners. The Committee agreed that the
projections adequately captured the observed global slowdown and its impact on
domestic employment and inflation.
     The Committee noted that additional stimulus from central banks had
underpinned growth and reduced the likelihood of a more-pronounced slowdown.
With some indicators of global growth improving in recent months, a faster
recovery in global growth was possible. However, on balance, the Committee was
more concerned about a continued slowdown rather than a faster recovery.
     The Committee discussed other potential risks to domestic spending. The
members acknowledged the importance of additional spending from households,
businesses, and the government, to meet their inflation and employment targets.
However, they noted several important uncertainties.
     The Committee noted upside and downside risks to the investment outlook.
Capacity pressure could see investment increase faster than assumed. On the
downside, if sentiment remained low as profitability remains squeezed,
investment might not increase as anticipated over the medium term. It was also
noted that firms' ability to invest is constrained by the current competition
for resources.
     A potential source of additional demand discussed by the Committee included
government spending being higher than currently projected, in view of the
current strength of the Crown balance sheet. This view was balanced by the
impact of any increase in government investment being delayed, for example due
to timing of the implementation of new initiatives and current capacity
constraints in the construction sector. The implications for monetary policy
remain to be seen.
     Some members noted that with lower mortgage rates and easing of
loan-to-value requirements, any possible pick-up in the housing market could
support household spending growth more than anticipated. The Committee noted
that employment is currently near its maximum sustainable level. However, it was
agreed that the outlook for employment growth is more subdued and capacity
pressure is expected to ease slightly in 2019.
     The Committee agreed that overall risks to the inflation projection were
balanced. The Committee noted the outlook for inflation is below the target
mid-point for longer than projected in the February Statement.
     The recent period of rising domestic inflation was discussed. The Committee
noted that the near-term outlook was more subdued due to lower capacity
pressure. It was also noted that cost pressures remain elevated, and that there
is a risk firms may pass these costs on as higher consumer prices by more than
assumed. However, it was agreed that inflation expectations remain well anchored
at the mid-point of the target range.
     The Committee also noted the relatively subdued private sector wage growth,
despite businesses suggesting that the inability to find labour is a significant
constraint on their growth. The Committee noted the limited pass-through of the
nominal wage growth to consumer price inflation.
     Some members noted slower global growth reducing imported inflation was a
downside risk to the inflation outlook.
     The Committee reached a consensus that, relative to the February Statement,
a lower path for the OCR over the projection period was appropriate. The lower
path reflected the economic projections and the balance of risks discussed, and
is consistent with both inflation and employment remaining near the Committee's
objectives.
     After discussing the relative benefits of holding the OCR and committing to
a downward bias, versus cutting the OCR now so as to establish a more balanced
outlook for interest rates, the Committee reached a consensus to cut the OCR to
1.50 percent.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
[TOPICS: MMNRB$,M$A$$$,M$N$$$,MT$$$$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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