RBNZ says interest rates unlikely to fall to zero in New Zealand

by NZ Adviser31 Aug 2016
(Bloomberg) -- New Zealand’s central bank doesn’t expect that zero interest rates will be required to combat low inflation, Assistant Governor John McDermott said.

“We’ll do what is appropriate and we’ll take the time that’s required” to get inflation back to target, McDermott told Radio New Zealand Tuesday. Asked if he was ruling out a zero cash rate, he said “I never rule anything out, but I don’t think we’re going to get there.”

The Reserve Bank of New Zealand this month cut the official cash rate to a record 2 percent and said further easing will be needed after forecasting inflation will be lower for longer. Investors are betting Governor Graeme Wheeler will drop the benchmark to 1.75 percent in November and eight of 16 economists forecast 1.5 percent by March next year.

Annual inflation was 0.4 percent in the second quarter and has been below the 1-3 percent range that the RBNZ targets for seven quarters. The RBNZ this month forecast it would return to 1 percent by the end of this year and 2 percent by the second half of 2018.

Inflation will “naturally rise” back into the target range as international factors such as low oil prices drop out of the calculation, McDermott said.

McDermott said low inflation is a global problem that has lasted longer than anyone expected and it looks to be continuing. New Zealand has imported that problem, which is weighing on inflation expectations and wage-setting behavior even as domestic price pressures build, he said.

“We are seeing non-tradable inflation move to a level we think is appropriate or close to it, and we will see tradable inflation at least not go negative,” he said. “So it is a matter for New Zealand to be just a little more patient.”

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