RBNZ still expects to cut interest rates to fresh record low

by NZ Adviser12 Oct 2016
(Bloomberg) -- New Zealand’s central bank said it still expects to cut interest rates to a fresh record low to revive inflation.

“Interest rates are at multi-decade lows, and our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range,” Reserve Bank Assistant Governor John McDermott said in a speech published on the bank’s website Tuesday. September quarter inflation data, due for release Oct. 18, “is expected to be low,” he said.

The comments reinforce bets that the RBNZ will lower its official cash rate by a quarter point to 1.75 percent at its next policy decision on Nov. 10. The bank is battling persistently weak inflation even as New Zealand’s economy grows at one of the fastest rates in the developed world and its housing market booms.

The New Zealand dollar extended its decline after the comments, falling to 70.64 U.S. cents at 4:50 p.m. in Wellington -- the lowest since late July. Investors now see an 81 percent chance of a rate cut next month, up from 70 percent yesterday.

‘Robust Pace’
McDermott, whose speech was titled “Understanding Low Inflation in New Zealand,” said much of the weakness in price pressure can be attributed to global developments that have driven up the Kiwi dollar and suppressed the cost of imports.

“Strong net immigration and increased labor market participation have also boosted the supply potential of the economy, meaning that New Zealand has been able to grow at a robust pace without generating significant inflation,” he said.

The bank expects inflation to rebound in the December quarter to the bottom of its 1-3 percent target range. Currently running at 0.4 percent, inflation has been below the 2 percent midpoint the RBNZ targets for five years.

RBNZ Governor Graeme Wheeler has expressed concern that ongoing weak headline inflation may result in further declines in price expectations and create a deflationary spiral.

“Low inflation becomes a concern if it leads to the possibility of deflation,” McDermott said. “Although we do not see any significant risk of deflation in New Zealand, deflation carries important costs.”

Some economists argue the RBNZ is too fixated on weak inflation and risks fueling a housing bubble with even lower borrowing costs. House prices rose 14.3 percent in the year to September, and the average price in largest city Auckland has almost doubled since 2007 to more than NZ$1 million ($707,000).

The economy is also barreling along, expanding 3.6 percent in the second quarter from a year earlier. That compares with growth of 3.3 percent in Australia, 2.2 percent in the U.K and 1.3 percent in the U.S.

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