New Zealand’s solid growth might not be enough to keep inflation on target, HSBC Bank has revealed, which may lead to further cuts from the Reserve Bank this year.
Strong tourist numbers and rising house construction in Auckland are expected to support solid growth in 2016, HSBC's chief economist Australia and New Zealand Paul Bloxham told journalists in a conference call on Friday, but inflation levels well below target will test the RBNZ's 25-year old IT regime.
“Low inflation is of course one of New Zealand’s big challenges,” said Bloxham, indicating global inflation will remain low for some time. “But it’s not just something that New Zealand is facing - it’s something that’s happening globally, which makes it even more of a challenge for the RBNZ.”
But the RBNZ is not alone in this problem, he says.
“Most major central banks around the world have had inflation below target for a number of years.”
The chief economist predicts a growth of 2.4% in 2016 for New Zealand but says it’s still below trend.
“Even when growth was very strong in New Zealand back in 2014 it wasn’t generating enough inflation. Inflation has been low for quite sometime now - it’s been below the near 2% target that the RBNZ has for 4 years. It’s starting to test the central banks 25 year old inflation targeting regime because they have now been off target for quite some time.”
“They face quite a stark trade-off – getting back to the inflation target might require a looser monetary policy but the risks are building in terms of financial stability.”
With the RBNZ announcement on the cash rate this Thursday, Bloxham says they will hold this time but may have scope to cut rates later in year.
“We do think that they will have an easing bias by the fact that inflation is still too low.”