February 13, 2019 / 1:56 AM / 6 months ago

UPDATE 2-NZ c.bank signals growth, policy risks; kiwi rallies as doves disappointed

* Reserve Bank of NZ holds rates at 1.75 pct

* Bank pushes back rate hike projections to March 2021

* NZ dlr rises 1.6 pct (Re-casts, adds governor quotes, updates market reaction)

WELLINGTON, Feb 13 (Reuters) - New Zealand’s central bank on Wednesday retained the possibility of a rate cut in the face of rising economic risks, but its broadly neutral policy tone disappointed doves and sent the local dollar rallying to one week highs.

The Reserve Bank of New Zealand (RBNZ) left the official cash rate (OCR) at a record-low 1.75 percent, where it has been since November 2016.

“The direction of our next OCR move could be up or down,” RBNZ Governor Adrian Orr said in a statement accompanying the widely-predicted policy decision.

Having first signalled the risks for rates were balanced in September last year, the central bank removed the reference in November.

Orr said the central bank expects to keep rates at their current level through 2019 and 2020, and told a media briefing that while a cut was “not ruled out as a possibility,” the risks of such a move hasn’t increased.

Taken together, the central bank’s stance was seen as less dovish than markets had wagered on, sending the New Zealand dollar rallying 1.6 percent to $0.6851 to a one-week high.

The RBNZ forecast rates at 1.84 percent in December 2020, pulling back from an earlier prediction of 2.0 percent by then.

While it did not cross 2 percent until September 2021 in the latest projections, the fact the central bank retained a long-term hike from its forecast disappointed rate bears.

“Financial markets have been moving towards pricing in the possibility of an OCR cut by the end of this year. Today’s statement didn’t do much to endorse that view,” said Dominick Stephens, chief economist at Westpac Bank.

The New Zealand money market unwound some of its gains but is still pricing in a 60 percent chance of a rate cut by November this year, ANZ said in a note.

GLOBAL POLICY SHIFT

Over recent weeks markets had been betting on a clear easing bias in the face of rising global pressure and as a number of major central banks, including the neighbouring Reserve Bank of Australia (RBA), downgraded growth forecasts.

The turn in policy impulse followed the U.S. Federal Reserve’s dovish shift last month, seen by markets as a signal that its three-year-drive to tighten monetary policy may be at an end as slowing global growth and trade tensions threatened to undermine the world’s biggest economy.

The RBNZ acknowledged ramped up international risks, especially the chance of a sharper downturn in key trading partners’ growth.

“One of the things that could trigger lower-than-otherwise domestic demand that we see as particularly strong is the global economic outlook,” Orr told reporters. “China has become an important conduit for our trade...China economic growth has slowed.”

But the central bank expects domestic impetus to temper external pressure on growth.

“Despite the weaker global impetus, we expect low interest rates and government spending to support a pick-up in New Zealand’s GDP growth over 2019,” Orr said.

That more optimistic outlook came despite recent figures showing economic growth slumped to 0.3 percent in the third quarter, its slowest pace in nearly five years and missing the bank’s forecast of 0.7 percent.

“Both our and the RBNZ’s OCR views are contingent on the economy regaining momentum over 2019,” said ASB chief economist Nick Tuffley.

“The strength (or otherwise) of the economy this year will be pivotal to whether the RBNZ remain on hold or does indeed cut the OCR.”

Reporting by Charlotte Greenfield and Praveen Menon in WELLINGTON and Swati Pandey and Wayne Cole in SYDNEY Editing by Shri Navaratnam

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