Wheeler Needs to Return Inflation to Target, English Says

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New Zealand central bank Governor Graeme Wheeler needs to get inflation back to target and some observers think he has “plenty of room” to cut interest rates, Finance Minister Bill English said.

“He’s been out of the zone for years now, below the midpoint for quite a long time,” English said in an interview late Thursday, referring to Wheeler’s 2 percent inflation goal. “He’s meant to be following the Policy Targets Agreement, that’s the bit I look at, and one day somebody will start asking the minister of finance questions about whether he’s actually following the agreement or not.”

The PTA between English and Wheeler stipulates that the Reserve Bank governor must keep inflation between 1 percent and 3 percent on average over the medium term, with a focus on the 2 percent midpoint. That target will be missed for a fourth straight year in 2015, with inflation currently running at just 0.1 percent. Wheeler, who raised borrowing costs four times in 2014, last week cut the benchmark rate by a quarter percentage point to 3.25 percent and said one more reduction was possible.

ANZ Bank New Zealand Ltd. and Westpac Banking Corp. both predict two more cuts this year after data yesterday showed economic growth slowed more than forecast to 0.2 percent in the first quarter.

“People think he’s got plenty of room” to lower rates, said English. “His vocabulary is ‘data-dependent’ now isn’t it? So he’s got his first significant piece of data.”

A Reserve Bank spokesman declined to comment.

Kiwi Dollar

Nine of 15 economists in a Bloomberg survey expect Wheeler to cut rates again next month. The New Zealand dollar has dropped about 9 percent against its U.S. counterpart since the end of April on expectations of lower borrowing costs. It traded at 69.38 U.S. cents at 3:30 p.m. in Wellington.

English said that as the U.S. central bank gets closer to raising rates, the kiwi dollar should fall further.

“The prime minister’s always more willing to stick a number on it, and he’s been saying 65 for a while,” English said. “The long-run average is the low 60s. Why would it be different from the long run? There’s a case for it being a bit stronger than that, but not massively stronger.”

The weaker exchange rate should eventually stoke prices and export earnings, and “we might find in 12 months’ time we’ve got 2 percent inflation,” he said. Still, the Reserve Bank had been forecasting inflation for a long time and it had yet to eventuate. The bank last week projected inflation will return to 2 percent in the fourth quarter of 2016.

Wheeler’s Dilemma

Asked if Wheeler made a mistake raising rates last year, English said central bank policy makers “make the best decisions they can at the time.”

“The world has changed in ways that weren’t anticipated,” he said. “Even six months ago everyone thought their interest rates were going up, that’s why they fixed them at what they thought were low, reasonable rates. And now they’ve found they’ve fixed too high.”

Wheeler’s dilemma was dealing with soft commodity prices on one hand and soaring house prices in Auckland on the other, English said. If property investors proved to be the big drivers of Auckland house prices, new measures to curb lending to them starting Oct. 1 could have “a big effect,” he said.

English was bullish on the outlook for the New Zealand economy.

“If we can have 3 percent growth with inflation rising a bit from zero and the U.S. dollar rate under 70, that’s pretty good conditions for sustainability -- provided we deal with the most obvious macro imbalance, being the housing market.”

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