REPEAT:MNI RBNZ Keep OCR Unch;Orr Says Door Open For Cut, Hike

Repeats Story Initially Transmitted at 23:38 GMT May 9/19:38 EST May 9

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of New Zealand has left the door open for

both a cut and a hike in the official cash rate, Governor Adrian Orr said

Thursday.

     In his first press conference since taking over as the governor in late

March, Orr said, "Yes the door is open to both a rate cut and a rate rise... the

risks are relatively balanced."

     Earlier Thursday, the RBNZ left the OCR unchanged at 1.75% as widely

expected but surprised with the language on its guidance that said the risks for

a move up or down are "equally balanced." At the same time, the RBNZ pledged to

keep the OCR unchanged for some time or a considerable period of time.

     Orr said the main scenario that could lead to a cut is faltering in

international growth or more importantly, tightening in international financial

conditions that would lead to a rise in long-term rate which would then filter

to New Zealand.

     Other reasons include constrained credit conditions as people are relying

on borrowing to continue their consumption path. Another important reason is

wage and price setting behaviour.

     "If that continues to be backward-looking, and based on past inflation, it

would take longer to reach the midpoint of inflation target," he said.

     Orr said that if banks pass on higher funding costs, the RBNZ would have to

reassess monetary policy. At the same time, he noted that higher competition may

be preventing banks from passing on increase in their funding rates.

     The OCR decision was Governor Orr's first and he ensured that he is

stamping his own mark by making significant changes to the one-page statement,

including in style by using Maori greetings.

     Orr began the statement by stating the outlook for monetary policy is for

the OCR to remain at 1.75% for "some time to come" along with the equally

balanced risks for a move up or down but ended saying it would remain at this

level for a "considerable period."

     "The Official Cash Rate (OCR) will remain at 1.75% for some time to come.

The direction of our next move is equally balanced, up or down. Only time and

events will tell."

     The last paragraph read: "To best ensure this outcome, we expect to keep

the OCR at this expansionary level for a considerable period of time. This is

the best contribution we can make, at this moment, to maximising sustainable

employment and maintaining low and stable inflation."

     There was just change made to the OCR forecast, with the RBNZ expecting the

rate to touch 1.9% in September 2019 versus June 2019 forecast in February. The

rest of the profile was left untouched, with profile extension to June 2021

forecast at 2.4%.

     There were small changes made to growth forecast but there was a downgrade

to inflation forecast, with 2.0% inflation now expected to be reached in

December 2020, compared with September forecast in February.

     The path for exchange rate was slightly lowered. At the press conference,

Orr was asked about his view on the decline in the New Zealand dollar Thursday.

He didn't indicate his comfort or discomfort at the level, merely saying that

the decline would be factored into the next OCR decision.

     The RBNZ said the risks around the OCR projection are broadly balanced.

This indicates "broadly balanced" risks around employment and activity, and

"balanced" risks to the inflation outlook.

     The two main risks that could push the OCR lower or higher related to

abrupt tightening in global financial conditions, and price-setting behaviour

locally, respectively.

     "If financial conditions were to tighten abruptly, global economic activity

would be adversely affected. This would reduce world demand and lower the price

of New Zealand's exports. Long-term interest rates would also increase, leading

to higher funding costs for New Zealand banks and higher mortgage rates."

     "While the New Zealand dollar TWI would depreciate, the increase in

mortgage rates and lower export prices would dampen consumption and business

investment. In this scenario, the Bank would need to lower the OCR to support

the economy and meet its inflation and employment objectives," the RBNZ said.

     On the other hand, "if businesses begin to see demand rise and costs

increase, this could result in price-setting behaviour becoming more

forward-looking, leading to a faster rise in inflation. This is particularly

relevant given the significant minimum wage increases expected over the

projection."

     "Such a change in price-setting behaviour would mean that less capacity

pressure would be needed to return inflation to the target mid-point. As such,

monetary policy would not need to be as stimulatory and the OCR would be higher

than in the central projection."

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com