Reserve Bank of New Zealand Governor Graeme Wheeler said while further monetary policy easing is likely, the economy currently isn’t weak enough to warrant big reductions in interest rates. The local dollar rose.
“Some local commentators have predicted large declines in interest rates over coming months that could only be consistent with the economy moving into recession,” Wheeler said in a speech in Tauranga published on the RBNZ’s website Wednesday. “At this point, we believe that several factors are supporting economic growth.”
Wheeler has cut the official cash rate twice in the past two months to revive inflation from near zero as slumping dairy prices curb economic growth. Most economists predict two more reductions by October, returning the key rate to a record low of 2.5 percent, and some see even deeper cuts.
Wheeler’s speech “reinforced that further easing is likely, but also explicitly damped the more exuberant OCR cut expectations,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “We remain comfortable with our view the RBNZ will cut the OCR by 25 basis points in both September and October to 2.5 percent.”
While traders still see a strong chance of a quarter-point cut in September, they reduced bets on the central bank cutting the cash rate to 2.5 percent in October after Wheeler’s speech, according to swaps prices compiled by Bloomberg.
The New Zealand dollar rose as high as 67.38 U.S. cents from 66.87 cents before Wheeler spoke. It bought 67.25 cents at 10:25 a.m. in Wellington. The currency has dropped more than 12 percent in the last three months.
“At current levels of export prices, a more substantial exchange rate depreciation will be required to stabilize the net external liabilities position,” Wheeler said.
He said there is potential for further downward pressure on global dairy prices and that the Federal Reserve and the Bank of England are likely to begin the process of normalizing their interest rates in coming months, “which could assist our currency lower.”
Wheeler also reiterated last week’s message that “some further monetary policy easing is likely to be required” to maintain growth around its potential and return inflation to the RBNZ’s 2 percent target. The inflation rate is currently running at 0.3 percent.
The central bank expects inflation to be close to 2 percent by the first half of 2016, Wheeler said.
The RBNZ will review its growth and inflation forecasts in its next Monetary Policy Statement, due Sept. 10.
At this point, it considered that the economy was growing at an annual rate of around 2.5 percent, supported by the easing in monetary conditions to date, continued high levels of migration and labor force participation, ongoing growth in construction and continued strength in the services sector, Wheeler said.
Policy makers are aware of the risk that low interest rates could exacerbate “the already extensive housing pressures in Auckland,” where house prices are rising at an annual pace of around 17 percent.
“The bank continues to be concerned about the financial stability risks and risks to the broader economy that would be associated with a major correction in Auckland house prices,” Wheeler said.
New restrictions on lending to Auckland property investors from Oct. 1, combined with the government’s intention to tax capital gains on properties held for less than two years, “should begin to ease the impact of investor activity,” he said.