MNI: RBNZ Leaves Key Rate Unchanged At 1.0%: Text

     WELLINGTON (MNI) - The Reserve Bank of New Zealand left its key cash rate

unchanged at 1.0% at the November 13 meeting.

     The statement of Governor Adrian Orr's text follows:

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     The Monetary Policy Committee has decided to keep the Official Cash Rate

(OCR) at 1.0 percent. Employment remains around its maximum sustainable level

while inflation remains below the 2 percent target mid-point but within our

target range. Economic developments since the August Statement do not warrant a

change to the already stimulatory monetary setting at this time.

     Economic growth continued to slow in mid-2019 reflecting weak business

investment and soft household spending. We expect economic growth to remain

subdued over the remainder of the calendar year. We will continue to monitor

economic developments and remain prepared to act as required.

     Trading-partner growth has also slowed. Growth in global trade and

manufacturing is weak and uncertainty remains high, dampening global business

investment. However, New Zealand's export commodity prices have been robust,

underpinning a positive terms of trade. The lower New Zealand dollar exchange

rate this year is also providing a useful additional offset to the weaker global

economic environment.

     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. Rising capacity pressures

are projected to promote a pick-up in business investment.

     Interest rates will need to remain at low levels for a prolonged period to

ensure inflation reaches the mid-point of our target range and employment

remains around its maximum sustainable level. We are committed to achieving our

inflation and employment objectives. We will add further monetary stimulus if

needed.

     Summary Record of Meeting - November 2019 Statement The Monetary Policy

Committee agreed that economic developments since the August Statement had been

offsetting for the monetary policy outlook. The members discussed the

projections and agreed that they formed a sound basis for their monetary policy

decision, but noted the near-term downside risks to the economy.

     The Committee agreed that accommodative monetary policy remains necessary

to continue to meet their inflation and employment objectives.

     The members noted that employment remains close to its maximum sustainable

level while consumer price inflation remains below the 2 percent target

mid-point but within the 1 to 3 percent target range.

     The Committee noted that global growth had continued to slow. The members

noted the weak global trade growth and continued elevated uncertainty.

     The Committee discussed the impact of the global slowdown on New Zealand

through trade, confidence, and financial channels. While the impact on New

Zealand was seen to be negative overall, some members noted that our export

commodity prices remained elevated which was boosting our terms of trade and

national income.

     The Committee noted the slowdown in domestic GDP growth. They also noted

that business surveys suggest weak growth has continued over the second half of

2019. The members discussed the slowdown in potential output growth, which may

explain the economy remaining near capacity over this time. Weaker demand was

expected to reduce capacity pressure in the near term, and ease some of the

recent labour market tightness.

     The members anticipated a lift in economic growth during 2020 from the

easing of monetary policy that has taken place since early 2019 and from

stronger fiscal stimulus.

     The Committee noted the signs that recent monetary stimulus was flowing

through the economy and supporting the medium-term growth projections. The

members noted that the reduction in retail lending rates over the past year

would support the outlook for consumption and broad investment. The Committee

noted the lower exchange rate this year as another channel supporting the

economy.

     The Committee discussed the impact of fiscal stimulus on the economy. The

members noted that fiscal stimulus could be greater than assumed. The members

also discussed the potential delays in implementing approved spending and

investment programmes.

     The Committee discussed the recent inflation developments and, in

particular, the recent increases in wage and non-tradables inflation. The

members noted the increase in inflation and wages is an expected outcome of

monetary stimulus transmitting through the economy. Some members noted the

pick-up in non-tradables inflation in the September 2019 quarter was partly due

to administrative prices.

     The Committee also noted the slight decline in one- and two-year ahead

survey measures of inflation expectations. Nevertheless, long-term inflation

expectations remain anchored at close to the 2 percent target mid-point and

market measures of inflation expectations have increased from their recent lows.

     The Committee members discussed some of the reasons why long-term interest

rates were near secular lows. They noted the contributions from global factors,

including ongoing low inflation, declining neutral interest rates, and policy

uncertainty. Given this, the Committee expected that low global interest rates

would persist for some time.

     The Committee discussed the effect of low interest rates on financial

stability. The members noted the risks to the soundness of the financial system.

They discussed the relationship between financial stability and the employment

and inflation objectives, noting the current deployment of financial stability

policies. The Committee agreed it was appropriate to continue to set interest

rates to meet its inflation and employment objectives.

     The Committee noted the Bank's work programme assessing alternative

monetary policy tools in the New Zealand environment, as part of contingency

planning for an unlikely scenario where additional monetary instruments are

required.

     The Committee agreed that it was necessary for monetary policy to remain

stimulatory for some time to meet its employment and inflation objectives. In

terms of least regrets, the Committee discussed the relative benefits of

inflation ending up in the upper half of the target range relative to being

persistently below 2 percent.

     The Committee debated the costs and benefits of keeping the OCR at 1.0

percent versus reducing it to 0.75 percent. 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.

     The Committee reached a consensus to keep the OCR at 1.0 percent. The

Committee noted that the risks to the economy in the near term were tilted to

the downside and agreed it would add further monetary stimulus if economic

developments warranted it.

     Attendees

     Reserve Bank staff: Adrian Orr, Geoff Bascand, Christian Hawkesby, Yuong Ha

External: Bob Buckle, Peter Harris, Caroline Saunders Observer: Caralee McLiesh

Secretary: Chris McDonald

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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