Fourth time lucky? RBNZ’s easing seen ending after cut

by NZ Adviser09 Nov 2016
(Bloomberg) -- After several false dawns, New Zealand’s central bank may be finally arriving at the end of its easing cycle.

Reserve Bank Governor Graeme Wheeler will deliver a quarter-point cut to the official cash rate Thursday, taking it to a fresh record-low 1.75 percent, predict all 17 economists in a Bloomberg survey. Most have scrapped forecasts for an additional reduction next year as a booming economy, tightening labor market and recovering dairy prices point to price pressures ahead.

Wheeler has been here at least three times before, expecting inflation to gather pace only to be forced to backpedal when it failed to materialize. However, with New Zealand’s economy now among the fastest-growing in the developed world, there are good reasons to expect price growth to pick up.

“Even the most pessimistic folk at the RBNZ must now realize that this country simply does not need lower interest rates,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “We can no longer justify, by any metric, the RBNZ cutting interest rates again” next year.

Wheeler may still be wary of calling an outright end to rate cuts. That could boost the New Zealand dollar, whose strength has curbed import prices and helped keep inflation below the bottom of his 1 to 3 percent target range for the past two years.

“We expect a mild easing bias, as distinct from an explicit one,” said Cameron Bagrie, chief economist at ANZ Bank New Zealand Ltd. in Wellington. While rates could still fall further, “it would now likely take something ugly offshore to drive that scenario,” he said.

One unknown is the outcome of this week’s U.S. presidential election, which has the potential to disrupt financial markets and alter the economic outlook.

‘Will’ to ‘May’?
For now, economists expect the RBNZ to tweak its policy statement on Nov. 10 -- the central bank’s last rate decision of the year -- to signal that additional stimulus in 2017 is not a certainty. One example could be changing its current refrain that further policy easing “will be required” to “may be required.”

The case for the RBNZ to stop cutting would be bolstered if, as most investors expect, the U.S. Federal Reserve tightens policy next month, reducing the rate differential and easing upward pressure on the New Zealand dollar.

The kiwi, which bought 73.36 U.S. cents in Wellington Tuesday, has climbed more than 7 percent this year even as Wheeler cut borrowing costs. That’s one reason why the RBNZ can’t pull out of a rate reduction this week, said Michael Gordon, acting chief New Zealand economist at Westpac Banking Corp. in Auckland.

“The RBNZ has strongly signaled a further easing, and failure to deliver would unnecessarily roil financial markets,” he said. “But with the downside risks for inflation diminishing, we expect the OCR to remain on hold through 2017.”

Traders are pricing just a 9 percent chance that the OCR will drop to 1.5 percent next year after Statistics New Zealand this week corrected its latest annual inflation read to 0.4 percent from 0.2 percent.

Housing Boom
With New Zealand’s economy expanding 3.6 percent in the year through June, some economists have questioned the need for the RBNZ to take its benchmark rate below 2 percent, especially as the nation’s surging housing market poses financial stability concerns.

The so-called Monetary Policy Shadow Board of private sector economists, academics and executives today recommended that the RBNZ keep its key rate unchanged on Thursday, saying economic momentum is strong and price pressures will pick up.

Tripped Up
Still, Wheeler has been repeatedly tripped up by inflation falling short of projections.

He raised the OCR four times in 2014 to 3.5 percent, before halting when the consumer price outlook weakened. In March the following year, he predicted a “period of stability” in rates, three months before cutting them as oil and dairy prices plunged.

In December 2015, after returning the OCR to 2.5 percent, Wheeler said he expected to achieve his inflation target “at current interest rate settings.”

Those experiences have helped to sharpen Wheeler’s focus on returning inflation to 2 percent, a goal the central bank hasn’t achieved since 2011, said Paul Bloxham, chief economist for Australia and New Zealand at HSBC Holdings Plc in Sydney.

“But by the time we get to the next rate meeting in February there will be signs inflation is stabilizing and the growth story will continue to be strong,” said Bloxham, who sees the rate of price increase accelerating to 1.5 percent in the first quarter of next year. After this week, “the RBNZ won’t need to deliver further cuts.”

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