The official interest rate remains at 1.75 percent. We expect to keep the OCR at this level through 2019 and 2020.
We are monitoring a number of risks, and overall these appear evenly balanced for the Official Cash Rate (OCR). If any of these risks materialise we may need to change the OCR, to ensure inflation returns to our target of 2 percent per year and to support maximum sustainable employment.
LATEST ANNUAL STATISTICS
Economic growth: 2.6 percent (Q3 2018)
Inflation: 1.9 percent (Q4 2018)
Employment growth: 2.3 percent (Q4 2018)
The Reserve Bank has kept the official interest rate at low levels. Low interest rates help to stimulate the economy by encouraging consumers to spend, and businesses to invest and hire more people. This lifts economic activity and supports inflation.
Inflation is near our 2 percent target, partly due to the large increases in petrol prices over 2018 which have now reversed. Therefore, to keep inflation close to target, the economy needs continued support from monetary policy.
The New Zealand economy relies a lot on trade with the rest of the world. In recent years, healthy growth in the global economy has supported demand for our exports.
The New Zealand dollar has weakened since 2017. This means that New Zealanders get better prices for their exports (helping to boost export incomes), but it also means that the cost of imports has risen.
There are signs that growth in the global economy is starting to slow down, in part because of uncertainty around trade policies. Global growth is expected to slow over the next few years, which may reduce demand for our exports.
The New Zealand economy is expanding at a solid pace, but more slowly than before. Demand for labour has remained strong, and the number of people unable to find a job has fallen over the past year. There are 60,000 more people employed than a year ago. Employment is near its sustainable level.
Government spending on hospitals, housing, and transport infrastructure will boost economic activity and job growth. Low interest rates will also encourage consumers to spend and businesses to invest, further supporting the economy.
There is a risk that economic growth could slow down further over the next year if a global slowdown reduces demand for our products. Should that happen, we could lower interest rates to support employment and ensure inflation remains around 2 percent.
Over the second half of 2018, an increase in petrol prices pushed inflation very close to our 2 percent target. However, petrol prices have fallen over the last few months, meaning that inflation is likely to be below target this year. Other consumer prices are rising only slowly, despite rising costs for businesses. Strong competition is making it harder for businesses to raise prices.
With high government spending and low interest rates, the economy should continue to grow, and price pressure should increase. Wages are likely to rise as competition for workers increases. We expect a gradual increase in inflation, but shrinking profit margins might mean that businesses raise their prices more quickly than we expect. Faster increases in inflation would cause us to raise interest rates sooner.