Reserve Bank hangs fire and says the OCR will remain low

The Reserve Bank says inflation will probably weaken in the short term.

As expected, acting Reserve Bank governor Grant Spencer has left the official cash rate unchanged and says monetary policy will remain accommodative for a considerable period.

The official cash rate remains at its record low 1.75%.

“Numerous uncertainties remain and policy may need to adjust accordingly,” Mr Spencer says in a statement.

“GDP was weaker than expected in the fourth quarter, mainly due to weather effects on agricultural production,” he says.

“Growth is expected to strengthen, supported by accommodative monetary policy, high terms of trade, government spending and population growth. Labour market conditions are projected to tighten further.”

Mr Spencer says residential construction continues to be hindered by capacity constraints but the Kiwibuild program is expected to contribute to housing growth from 2019.

“House price inflation remains moderate, with restrained credit growth and weak house sales.”

The statement says inflation will probably weaken further in the near term due to softness in food and energy prices and adjustments to government charges.

“Tradeables inflation is projected to remain subdued through the forecast period.” The central bank forecasts three years ahead.

“Non-tradeables inflation is moderate but is expected to increase in line with a rise in capacity pressure.”

As usual, the Reserve Bank says it expects inflation to trend upward over the medium term towards the midpoint of its 1-3% target range.

Mr Spencer says the outlook for global growth continues to gradually improve and commodity prices and agricultural prices are trending higher.

His statement comes two hours after the Federal Reserve in the US raised rates there by 0.25 basis points, a move financial markets had expected.

More to come.

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