Wheeler says RBNZ sees no need for rapid interest-rate cuts

by NZ Adviser24 Aug 2016
(Bloomberg) -- New Zealand central banker Graeme Wheeler said while he intends to lower interest rates further to revive inflation, a series of rapid cuts is not justified.

“We do not believe that the outlook and balance of risks warrants a position of no policy change, nor a position of rapid easings,” Wheeler said in a statement published on the Reserve Bank’s website Tuesday. “Rapid ongoing decreases in interest rates would likely result in an unsustainable surge in growth, capacity bottlenecks, and further inflame an already seriously overheating property market.”

The New Zealand dollar climbed on the comments, which reinforce signals from the bank that the next reduction in rates is more likely to come in November than at its next policy decision in September. Wheeler is trying to get weak inflation back into his 1-3 percent target band without overheating the economy, which is in the throes of immigration and housing booms and forecast to gather steam over the coming year.

“This should put thoughts of 50 basis point cuts to bed, and at the margin, suggests the hurdle to a September cut is high,” Cameron Bagrie, chief economist at ANZ Bank New Zealand in Wellington, said in a note. “We continue to expect a measured approach, with easings likely in November and February.”

Currency Gain
The currency jumped more than half a U.S. cent immediately after Wheeler’s statement, released at 9 a.m. in Wellington Tuesday. It bought 73.27 cents at 5:21 p.m., up 0.8 percent on the day.

Earlier this month, the RBNZ cut its official cash rate to a fresh record low of 2 percent and said at least one further reduction would be needed to return inflation to target. Inflation is currently running at just 0.4 percent and has been below the RBNZ’s 2 percent goal for almost five years. 

Wheeler used Tuesday’s statement to counter various views on what the RBNZ should be doing with monetary policy.

He dismissed the idea that he shouldn’t be lowering borrowing costs in an environment of strong economic growth, saying if financial markets believed the bank was content with below-target inflation then the already-high kiwi dollar might rise substantially, hurting growth and damping price pressures even further.

Self-Perpetuating Spiral
Low headline inflation could bring down inflation expectations in a self-perpetuating spiral that would be difficult to correct, which was the main reason for the bank’s decision to ease rates this month, he said.

However, Wheeler also countered the view that a more aggressive response to weak inflation was needed. Cutting rates too quickly “would use up much of the bank’s capacity to respond to the likely boom/bust situation that would follow, and place the Reserve Bank in a situation similar to many other central banks of having limited room to respond to future economic or financial shocks,” he said. If emerging information and risks unfold in a manner that warrants a change in judgment, “we will modify our policy settings and outlook.”

Inflation Targeting
Wheeler mounted a defense of inflation targeting, which the RBNZ pioneered in the early 1990s, saying it remains the most appropriate framework for conducting monetary policy in New Zealand.

While there is nothing sacrosanct about a particular inflation goal, “changing a target when times become tougher reduces the incentives on central banks to achieve earlier agreed goals,” he said. “It could damage the central bank’s credibility -- particularly if a perception develops that the central bank will continually seek to re-specify goals.”

The comments were part of a speech written by Wheeler and delivered by Assistant Governor John McDermott in Dunedin this morning, the RBNZ said.

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