New Zealand holds rate, may cut if inflation heads lower

April 30, 2015

By CentralBankNews.info
    New Zealand’s central bank left its benchmark Official Cash Rate (OCR) unchanged at 3.5 percent, as widely expected, but raised the possibility of a rate cut by saying that any changes in the policy rate would depend on inflationary pressures and “it would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target.”
    The Reserve Bank of New Zealand (RBNZ), which raised its rate by 100 basis points in 2014 before switching to a neutral bias in January and March, ruled out any near-term rate rises by saying it “expects to keep monetary policy stimulatory, and is not currently considering any increase in interest rates.”
    The policy statement echoes a speech by RBNZ Assistant Governor John McDermott on April 22 when he said the outlook for inflation was subdued, suggesting that monetary policy should remain stimulatory for a prolonged period and any weakening of demand and inflationary pressures would prompt the bank to consider lowering rates.
    The RBNZ’s mention of a possible rate cut compares with its statement from last month when it said any future rate changes could be up or down, depending on the flow of data.
    Although New Zealand’s economy continues to grow at a rate of 3 percent, the RBNZ is clearly concerned about the outlook, saying lower dairy incomes, the lingering effects of drought, fiscal consolidation and the high exchange rate were “weighing on the outlook for growth.”
    In March the central bank described the country’s economy as “strong” even as it also pointed to the same factors as weighing on growth.
    The RBNZ voiced its displeasure with the recent rise in the New Zealand dollar’s exchange rate, saying this appreciation was “unwelcome” and repeated its recent view that it remains “unjustifiably high and unsustainable.”
    After depreciating from July 2014 to February this year, the New Zealand dollar, known as the kiwi, has reversed course and strengthened, putting further downward pressure on inflation by lowering import prices.
    The kiwi was trading at 1.31 to the U.S. dollar today, up from 1.379 on Jan. 31 but still below 1.28 at the start of the year.
    Consumer price inflation plunged to 0.1 percent in the first quarter of this year from 0.8 percent in the fourth quarter, well below the RBNZ’s target of 2.0 percent, plus/minus 1 percentage point.

   
    The Reserve Bank of New Zealand issued the following statement by its governor, Graeme Wheeler:

“The Reserve Bank today left the Official Cash Rate unchanged at 3.5 percent.
Trading partner growth continues at around its long-term average, but remains dependent on highly accommodative monetary settings. Policy interest rates are at record lows and many European government bonds are trading at negative yields. Looking ahead, considerable uncertainties exist in Europe, China and Australia, and on the timing of US monetary policy adjustment, although global growth should be boosted by the decline in world oil prices. Crude oil prices are almost 50 percent below their July 2014 level, with increasing supply mostly contributing to this fall.
The New Zealand economy continues to grow at an annual rate of around 3 percent, supported by low interest rates, high net immigration and construction activity, and the fall in fuel prices. House price inflation is elevated in Auckland. However, lower dairy incomes, lingering effects of drought, fiscal consolidation, and the high exchange rate are weighing on the outlook for growth.
Lower fuel prices, coming on top of the high exchange rate and low global inflation, lowered annual CPI inflation to 0.1 percent in the March quarter. Underlying inflation remains low and is expected to pick up gradually. Monetary policy will focus on the medium-term trend in inflation. The Bank expects to keep monetary policy stimulatory, and is not currently considering any increase in interest rates.
We are watching closely the ongoing impact on tradables inflation from global forces and the high New Zealand dollar.  On a trade-weighted basis, the New Zealand dollar continues to be unjustifiably high and unsustainable in terms of New Zealand’s long-term economic fundamentals.   The appreciation in the exchange rate, while our key export prices have been falling, is unwelcome.
The timing of future adjustments in the OCR will depend on how inflationary pressures evolve in both the non-traded and traded sectors.  It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target.
The Bank will continue to monitor and carefully assess the emerging flow of economic data.”
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