New Zealand’s central bank governor strikes dovish tone, keeps rates on hold

New Zealand’s central bank governor struck a dovish tone in his maiden monetary policy statement on Thursday, saying the next move in rates could equally be a cut or a hike, while holding settings at a record low.

The Reserve Bank of New Zealand’s decision to keep settings unchanged was in line with economist expectations, however, Governor Adrian Orr diverged from his recent predecessors by explicitly saying an easing was as likely to be the next move as a tightening.

Orr painted a relatively rosy picture of the New Zealand economy, saying both economic growth and employment remained robust, but acknowledged the stubbornly low inflation he has also inherited.

“I have started in what I would call a sweet spot for any governor to turn up in,” Orr told reporters in his first press conference since taking the helm in March.

In the official statement, Orr said rates would remain at 1.75 percent for “a considerable period of time” and the “direction of our next move is equally balanced, up or down. Only time and events will tell.”

Investors reacted by pushing the New Zealand dollar to a five-month low of $0.6928, from $0.6990 before the statement. It later recovered a little to $0.6936.

The decision was closely watched as economists and investors looked for clues on how Orr would handle a new policy goal of “maximising sustainable employment” alongside traditional inflation targeting.

Orr said risks “are relatively balanced,” citing “perplexing” low wages and employment already at sustainable levels, alongside low inflation. Internationally, he said the risks included faltering growth or further tightening of financial conditions.

“The market has taken it a little bit on the dovish side,” said Sharon Zollner, senior economist at ANZ in Auckland.

The new governor put an early stamp on his authority by overhauling the policy statement, which had changed little in several months under his predecessors.

Orr inherited the same tepid inflation that had forced the two previous governors to hold the official cash rate steady since slashing it to its current record low in late 2016.

The bank trimmed its inflation forecasts a little to hit the 2 percent mid-point of its target band by the fourth quarter of 2020, a quarter later than previously predicted.

New Zealand’s annual headline inflation slowed to just 1.1 percent in the first quarter, just within the RBNZ’s target band, but well below the midpoint of 2 percent.

“It is a concern and that’s why we’re keeping monetary policy expansionary,” Orr said.