What the bank said: OCR unchanged and to stay low for longer

The Reserve Bank has kept the Official Cash Rate at its record low level and it will stay there for longer than previously forecast Here's why.

Thursday, August 9th 2018, 9:00AM

The Official Cash Rate (OCR) remains at 1.75%. We expect to keep the OCR at this level through 2019 and into 2020, longer than we projected in our May Statement. The direction of our next OCR move could be up or down.

While recent economic growth has moderated, we expect it to pick up pace over the rest of this year and be maintained through 2019.

Robust global growth and a lower New Zealand dollar exchange rate will support export earnings. At home, capacity and labour constraints promote business investment, supported by low interest rates. Government spending and investment is also set to rise, while residential construction and household spending remain solid.

The labour market has tightened over the past year and employment is roughly around its maximum sustainable level. We expect the unemployment rate to decline modestly from its current level.

There are welcome early signs of core inflation rising. Inflation will increase towards 2% over the projection period as capacity pressures bite. This path may be bumpy however, with one-off price changes from global oil prices, a lower exchange rate, and announced petrol excise tax rises expected. We will look through this volatility as appropriate, and only respond to any persistent movements in inflation.

Risks remain to our central forecast. The recent moderation in growth could last longer. Low business confidence can affect employment and investment decisions. Conversely, there is a chance that inflation could increase faster if cost pressures can pass through into higher prices and impact inflation expectations.

We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.