September 26, 2018 / 10:01 PM / a month ago

UPDATE 2-NZ central bank in neutral as its holds rates at record low

* RBNZ holds official cash rate at 1.75 pct

* Rates likely to remain on hold into 2020 -governor

* Global trade tensions adding to risk outlook -governor (Adds detail on Asia central banks, updates market reaction)

By Charlotte Greenfield and John Mair

WELLINGTON, Sept 27 - New Zealand’s central bank kept its cash rate steady at a record low on Thursday and said the direction of the next change was still in the balance, citing tepid inflation and a turbulent international outlook.

The Reserve Bank of New Zealand (RBNZ) was not quite as gloomy as its August statement, after stronger-than-expected growth data and an improvement in weak business sentiment, but said it remained concerned over the risk of a trade war.

The RBNZ held the official cash rate (OCR) steady at 1.75 percent for the 13th review in a row, having last cut rates in November 2016 to counter persistently low inflation.

“Consumer price inflation remains below the 2.0 percent mid-point of our target, necessitating continued supportive monetary policy,” RBNZ Governor Adrian Orr said in a statement.

The central bank had adopted a more dovish tone at its last meeting in August, pushing out the timing of any rate rise until 2020 and warning it would shift its bias towards a rate cut if growth fell short of its expectations.

Orr dropped the reference to sinking business confidence as a risk to growth that was in the central bank’s last monetary policy statement in August.

Figures out on Wednesday showed business confidence reversing its trajectory after falling throughout the year to 10-year lows, though firms remained pessimistic.

“Firmly neutral in our opinion and with one source of downside risk removed from the policy assessment, we suspect the Governor sought to move the market’s reaction away from the dovish reading that accompanied the August (statement),” Citi economists said in a report.

The RBNZ said inflation, currently running at an annual 1.5 percent, would eventually rise to the midpoint of its 1-3 percent target as capacity pressures mounted.

The policy decision came amid a plethora of central bank meetings, with many lifting rates and shifting to a more hawkish stance.

Just hours before the RBNZ released its decision, the U.S. Federal Reserve lifted its fed funds rate to a range of 2.00 to 2.25 percent and ended the long-running characterisation of its policy as “accommodative”.

New Zealand’s official interest rates were last lower than the fed funds rate in 2000.

Central banks in Taiwan, Hong Kong and Indonesia are also set to review monetary policy on Thursday.

The New Zealand dollar initially jumped as high as $0.6676 from $0.6657 before the decision was published. The kiwi then pared most of its gains to trade around $0.6659.

RISKS TO OUTLOOK

Despite being confident inflation would pick up, the central bank flagged a number of risks to the economic growth outlook in coming months.

“The RBNZ showed a slightly greater degree of caution about the path forward: continued wariness over the domestic growth outlook (as we expected), but also noting trade tensions more prominently than in the August Monetary Policy Statement,” said Nick Tuffley, chief economist at ASB Bank.

Orr acknowledged the surprisingly strong 1.0 percent quarterly economic growth in the second quarter which was double the RBNZ’s forecasts, but warned its growth forecasts were looking increasingly fragile. “While GDP growth in the June quarter was stronger than we had anticipated, downside risks to the growth outlook remain,” said Orr. He flagged international trade policy tensions which could undermine global economic growth, but noted that spending and investment by households and the government was likely to support growth in New Zealand. (Reporting by Charlotte Greenfield and John Mair in Wellington; additional reporting by Swati Pandey and Wayne Cole in Sydney; editing by Clive McKeef)

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