RBNZ says easing probably over as inflation pressure grows

by NZ Adviser11 Nov 2016
(Bloomberg) -- New Zealand’s central bank cut interest rates to a fresh record low and said it has probably done enough to return inflation to target as economic growth quickens.

“At this stage we think that we won’t need another cut,” Reserve Bank Governor Graeme Wheeler told a news conference in Wellington Thursday after lowering the official cash rate by a quarter point to 1.75 percent. He left the door ajar to further action if needed, saying “numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”

New Zealand’s economy is among the fastest growing in the developed world, building pressure on inflation which has languished below the RBNZ’s 1-3 percent target band for two years. Wheeler has cut borrowing costs seven times since June 2015 in an effort to stoke price increases by boosting domestic demand, and to contain the strong local currency.

New Zealand “is not an economy that is crying out for urgent stimulus to boost inflation,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “From here we continue to expect the RBNZ will remain on hold, which is the RBNZ’s current stance.”

The kiwi dollar rose more than half a U.S. cent immediately after the statement and has climbed 8 percent the past six months. It pared gains to buy 72.98 U.S. cents at 3 p.m. in Wellington after Wheeler said the RBNZ has “an open mind” on the question of currency intervention. He declined to comment further.

“The exchange rate remains higher than is sustainable for balanced economic growth and, together with low global inflation, continues to generate negative inflation in the tradables sector,” Wheeler said in the policy statement. “A decline in the exchange rate is needed.”

All 17 economists surveyed by Bloomberg expected today’s decision. Ten of 15 forecast the benchmark rate will remain at 1.75 percent next year; swaps traders predict almost no chance of another quarter-point cut.

Trump Presidency
Donald Trump’s election as next U.S. President creates near-term uncertainty for Wheeler. If the Federal Reserve were to hold off raising interest rates for fear of hurting U.S. growth., that could boost the kiwi dollar and require the RBNZ to cut rates again in 2017.

Wheeler’s efforts to lower the currency have been thwarted by record stimulus abroad and the Fed’s failure to press ahead with rate increases, which has kept New Zealand’s benchmark rate high relative to those of its peers.

The RBNZ today began projecting levels of the OCR, replacing its previous forecasts of the 90-day bank bill yield, which were used as an indicator of policy direction. The average OCR will be 1.8 percent in the first quarter of 2017 from 1.9 percent in the current quarter, and 1.7 percent thereafter.

‘Small Probability’
The forecasts imply “a small probability of a further easing, but with no strong commitment to doing so,” said Michael Gordon, acting chief New Zealand economist at Westpac Banking Corp. in Auckland. “We expect the OCR will remain on hold for an extended period.”

Currently at 0.4 percent, inflation has been below the RBNZ’s target band for eight straight quarters and below the 2 percent midpoint it tries to achieve since the end of 2011. The central bank today forecast it will return to 2 percent by the fourth quarter of 2018, three months later than it predicted in August.

“Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, and reduced drag from tradables inflation,” Wheeler said.

Not Alone

While New Zealand is not alone in experiencing very weak general inflation, unlike many other peers it has an economy expanding at a healthy clip, supported by record immigration, tourism and construction. Gross domestic product rose 3.6 percent in the second quarter from a year earlier.

Growth will quicken to 3.9 percent in the first quarter of 2017 from a year earlier, the RBNZ forecast. That’s stronger than the 3.5 percent it predicted in August. Annual growth will be 3.1 percent in the first quarter of 2018, it said.

Wheeler last month introduced new lending restrictions for property investors in an attempt to cool the nation’s rampant housing market and give himself more room to lower rates. There are signs the tighter rules may be having an impact, with prices rising 12.7 percent in October from a year ago, down from a 14.3 percent pace in September.

“House price inflation remains excessive and is posing concerns for financial stability.” Wheeler said. “Although house price inflation has moderated in Auckland, it is uncertain whether this will be sustained given the continuing imbalance between supply and demand.”
 

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