RBNZ Says Rates to Remain Stimulatory as Inflation Near Zero

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New Zealand’s central bank ruled out interest-rate increases and said it would consider cutting borrowing costs if inflation pressures weaken further.

The outlook for inflation is subdued and “suggests that monetary policy should remain stimulatory for a prolonged period,” Reserve Bank Assistant Governor John McDermott said in a speech Thursday. “Evidence of weakening demand and domestic inflationary pressures would prompt us to consider lowering interest rates.”

Annual inflation fell to a 15-year low of 0.1 percent in the first quarter after oil prices slumped and a strong currency made imports cheaper. The RBNZ last month said it was neutral on the outlook for interest rates even as it forecast inflation won’t return to its 2 percent target until 2017.

While McDermott’s comments may not constitute a “marquee moment for the RBNZ,” they signal a shift in the central bank’s stance toward an easing bias, said Michael Turner, a strategist at Royal Bank of Canada in Sydney. “We remain comfortable expecting cuts over the course of this year.”

The New Zealand dollar fell about half a U.S. cent after the speech was published to trade at 75.81 U.S. cents at 2:00 p.m. in Wellington, a one-week low.

Inflation hasn’t exceeded the midpoint of the 1 percent-to-3 percent the RBNZ targets since 2011.

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“Inflation has been low in New Zealand for a number of years,” McDermott said. “At present, the outlook requires a period of supportive monetary policy.”

The RBNZ will keep the official cash rate at 3.5 percent on April 30, according to all 10 economists surveyed by Bloomberg News. There is a 57 percent chance of a rate cut by December, according to swaps data compiled by Bloomberg.

“At present, the bank is not considering any increase in interest rates,” McDermott said today. “Before considering any tightening in monetary policy we would need to be confident that increased capacity utilization and labor market tightness was generating, or about to generate, a substantial increase in inflation.”

The RBNZ on March 12 signaled that interest rates wouldn’t change until at least the first half of 2017. Governor Graeme Wheeler said that with the economy forecast to grow more than 3 percent this year and next, New Zealand is in a different situation from nations that have cut interest rates.

McDermott today said there are “areas of uncertainty” surrounding the outlook for economic growth and capacity pressures including curbs on government spending, falling dairy incomes and the currency.

The RBNZ is also assessing the outlook for tradables inflation, which is being damped by global conditions and the high exchange rate, he said, adding that the currency’s gains are “unwelcome.”

The RBNZ will continue to monitor wage bargaining and price-setting outcomes, McDermott said. “Should these settle at levels lower than our target range for inflation, it would be appropriate to ease policy,” he said.

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