MNI: RBNZ Leaves Key Rate Unchanged At 1.5%: Text

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

unchanged at 1.5% following the June 26 meeting, but noted a lower cash rate

could be needed to meet its objectives.

     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) remains at 1.5 percent. Given the weaker

global economic outlook and the risk of ongoing subdued domestic growth, a lower

OCR may be needed over time to continue to meet our objectives.

     Domestic growth has slowed over the past year. While construction activity

strengthened in the March 2019 quarter, growth in the services sector continued

to slow. Softer house prices and subdued business sentiment continue to dampen

domestic spending.

     The global economic outlook has weakened, and downside risks related to

trade activity have intensified. A number of central banks are easing their

monetary policy settings to support demand. The weaker global economy is

affecting New Zealand through a range of trade, financial, and confidence

channels.

     We expect low interest rates and increased government spending to support a

lift in economic growth and employment. Inflation is expected to rise to the 2

percent mid-point of our target range, and employment to remain near its maximum

sustainable level.

     Given the downside risks around the employment and inflation outlook, a

lower OCR may be needed.

     Meitaki, thanks.

     Summary Record of Meeting The Monetary Policy Committee agreed that the

outlook for the economy has softened relative to the projections in the May 2019

Statement.

     The Committee noted that inflation remains slightly below the mid-point of

the inflation target and employment is broadly at its maximum sustainable level.

The Committee agreed that a lower OCR may be needed to meet its objectives,

given further deterioration in the outlook for trading-partner growth and

subdued domestic growth.

     Relative to the May Statement, the Committee agreed that the risks to

achieving its consumer price inflation and maximum sustainable employment

objectives are tilted to the downside.

     The members noted that global economic growth had continued to slow. They

discussed the recent falls in oil and dairy prices, and that several central

banks are now expected to ease monetary policy to support demand.

     The Committee discussed the ongoing weakening in global trade activity. A

drawn out period of tension could continue to suppress global business

confidence and reduce growth. Resolution of these tensions could see uncertainty

ease.

     The Committee discussed the trade, financial, and confidence channels

through which slowing global growth and trade tensions affect New Zealand. The

members noted in particular the dampening effect of uncertainty on business

investment. Some members noted that lower commodity prices and upward pressure

on the New Zealand dollar could see imported inflation remain soft.

     While global economic conditions had deteriorated, the Committee noted that

domestic GDP growth had held up more than projected in the March 2019 quarter.

The members discussed disparities in growth across sectors of the economy, with

construction strong and services weak. The members also discussed whether some

of the factors supporting growth in the quarter would continue.

     The members noted two largely offsetting developments affecting the outlook

for domestic growth: softer house price inflation and additional fiscal

stimulus.

     The Committee noted that recent softer house prices, if sustained, are

likely to dampen household spending. The Committee also noted the recent falls

in mortgage rates and the Government's decision not to introduce a capital gains

tax.

     The Committee noted that Budget 2019 incorporated a stronger outlook for

government spending than assumed in the May Statement. The members discussed the

impact on growth of any increase in government spending being delayed, for

example due to timing of the implementation of new initiatives and current

capacity constraints in the construction sector.

     The members discussed the subdued nominal wage growth in the private sector

and the apparent disconnect from indicators of capacity pressure in the labour

market. The Committee discussed the possibility of this relationship

re-establishing. Conversely, the continuing absence of wage pressure could

indicate that there is still spare capacity in the labour market. Some members

also noted that reduced migrant inflows could see wage pressure increase in some

sectors.

     The Committee discussed whether additional monetary stimulus was necessary

given continued falls in global growth and subdued domestic demand. The members

agreed that more support from monetary policy was likely to be necessary.

     The Committee discussed the merits of lowering the OCR at this meeting.

However, the Committee reached a consensus to hold the OCR at 1.5 percent. They

noted a lower OCR may be needed over time.

     Attendees

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

External: Bob Buckle, Peter Harris, Caroline Saunders Observer: Gabriel Makhlouf

Secretary: Chris McDonald

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

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