New Zealand’s central bank has pushed out its forecast for raising interest rates from their record low by one year owing to downside risks to the economic outlook.

The Reserve Bank of New Zealand held interest rates steady at 1.75 per cent, as expected, but the shift in timing means it could be raising interest rates for the first time in this policy cycle even after the Bank of Japan, widely seen as the most accommodative of major global central banks.

That caught markets off guard and prompted a sharp drop in the New Zealand dollar, which was down by more than ⅔ of 1 per cent against its US counterpart to its lowest level in more than two years.

Adrian Orr, RBNZ governor, said the Bank expected to keep the official cash rate at 1.75 per cent “at this level through 2019 and into 2020, longer than we projected in our May Statement” before reiterating the next move could be up or down.

In its August Statement, the RBNZ noted that gross domestic product growth had slowed over the past year. It added that fiscal and monetary stimulus, as well as higher net exports, “are expected to lift growth over the next two years, but the risks to the growth outlook are to the downside.”

The RBNZ added that the labour market has tightened over the past year and that employment is near its maximum sustainable level. Inflation is still below the 2 per cent target “but there are early signs of inflationary pressure rising.”

On balance, though the RBNZ’s updated forecasts suggest its next policy move will be higher in the September quarter of 2020, a full year later than its prediction in May.

Paul Dales at Capital Economics said the forecasts suggested there was little chance of rates rising before September 2020 and they would probably would not reach 2 per cent until December of that year, which would be “much later” than the markets’ current expectations for rate rises in mid-2019.

“We think more of the easing in GDP growth will prove to be permanent, resulting in growth averaging just 2.0 per cent in the 2019 calendar year. That, and the RBNZ’s own projection, suggest the growing risk is that our forecast that rates will rise in mid-2020 proves premature,” Mr Dales wrote in a note.

Despite much market speculation to the contrary, the Bank of Japan late last month pledged to keep policy settings accommodative for an extended period, even while the central banks of the US and UK are raising rates and the European Central Bank is also soon expected to begin unwinding its stimulus.

However, the BoJ is expected to have raised interest rates for the first time from their current level of minus 0.1 per cent by summer of 2020, or possibly earlier, according to the market implied target rate data tracked by Bloomberg.

The kiwi dollar recovered some ground to be 0.5 per cent weaker, buying 67.16 US cents, and having been down as much as 0.7 per cent. The currency fell to its lowest level against the greenback since May 2016.

The Australian dollar shot up ¾ of 1 per cent against its New Zealand cousin.

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