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Economy

New Zealand will keep interest rate at historic low until 2020

Unexpectedly dovish policy, prompted by slackening growth, weakens currency

The New Zealand dollar hit its weakest level in more than two years due to a continued expansionary monetary policy.   © Reuters

SYDNEY -- The Reserve Bank of New Zealand will keep its policy interest rate at the historic low of 1.75% until 2020, the central bank announced Thursday.

The news sent the New Zealand dollar weakening to 66.65 U.S. cents at one point -- its lowest since the end of March 2016. Many observers had anticipated a rate hike in mid-2019.

The Official Cash Rate is to remain at 1.75% "through 2019 and into 2020, longer than projected in our May statement," Gov. Adrian Orr said in the central bank's latest policy statement. Three months ago, Orr had said the rate would be kept at that level "for some time to come."

The bank lowered its real gross domestic product growth projection through March 2019 to 2.6% on average, from the 3.1% projected in May. "The recent moderation in growth could last longer. Low business confidence can affect employment and investment decisions," Orr said.

Orr, who took office in March, was initially perceived as a governor who would focus on price targets and avoid dovish policy approaches. The latest statement, however, signals a different course, according to New Zealand media.

The consumer price index for the April-June quarter rose just 1.5%, falling below the midpoint of the 1% to 3% inflation target range for a fifth straight quarter.

"We will keep the [policy rate] at an expansionary level for a considerable period to contribute to maximizing sustainable employment, and maintaining low and stable inflation," the bank governor said.

Paul Dales, an economist at U.K.-based Capital Economics, expects no rate hike until December 2020.

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