WELLINGTON (Reuters) - New Zealand’s central bank will keep “blowing wind into the sails” of a slowing economy, and is ready to respond to any further weakness in growth as business sentiment sours, Governor Adrian Orr said on Thursday.
Inflation was showing some signs of heading towards the 2 percent mid-point of the Reserve Bank of New Zealand’s (RBNZ)target range, but it was well contained, Orr told Reuters in an interview on Thursday after the central bank held its cash rate at a record low 1.75 percent as expected.
“On balance, we just need to be continuing to make sure that we are blowing wind into the sails of the economy for some time yet,” he said
“And in fact, if you saw a deterioration in growth, i.e. a non response, then we might have to blow more wind.”
Orr spoke after the RBNZ surprised investors by projecting rates to remain steady well into 2020, much longer than previously forecast, sending the New Zealand dollar skidding.
He noted that over the past 18 months, the central bank had been expecting activity to pick up from below-potential rates but the economy hadn’t responded to policy stimulus as expected.
As a result, the RBNZ cut its forecast for gross domestic product (GDP) growth in 2019 to 2.6 percent from 3.1 percent in its policy review on Thursday.
That is lower than the 2.7 percent annual rate clocked in the first quarter and is below a recent peak of 3.3 percent in 2017.
With inflation expectations well anchored and global growth likely to lose some momentum, the central bank would “be sensitive” to further downside surprises on GDP growth, Orr said.
Business confidence fell to a decade-low in July, an ANZ Bank survey showed, extending a trend evident since a centre-left government took office late last year.
“That’s our number one downside risk... that people talk themselves into not investing,” Orr said.
With interest rates low and capacity constraints emerging, the governor said conditions were favourable for investment. But falling confidence meant that firms may be reluctant to commit funds, and that could feed through to weaker overall growth.
Orr said while the growing trade war between the United States and China was attracting a lot of attention, so far the impact on New Zealand, which is an open trade-dependent economy, was not large.
“It’s a very hard thing to model, we had a crack at it, and the answer is from what we’ve seen to date it doesn’t make a huge difference,” he said.
“But it could get bigger, and/or it could impact global business confidence.”
Orr said with U.S. rates set to rise further above the RBNZ’s cash rate, the New Zealand dollar’s weakness was not surprising, with the central bank projecting the currency to decline further in trade-weighted terms in coming years.
The New Zealand dollar hit its lowest in nearly two and a half years against the U.S. dollar on Thursday, and is down nearly six percent this year.
“I mentioned that I have been really pleased with how the exchange rate has been behaving, because effectively it’s been doing what it’s meant to do, which is reflect the relative expected inflation differentials between two currencies.”
Reporting by Charlotte Greenfield and John Mair; Editing by Shri Navaratnam