RBNZ Says Further Easing May Be Needed to Boost Inflation

  • Wheeler says further currency depreciation is appropriate
  • Inflation will take longer to reach target than expected

New Zealand’s central bank said it may need to cut interest rates further as falling oil prices and a weaker global growth outlook prolong a period of low inflation.

“Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range,” Reserve Bank Governor Graeme Wheeler said Thursday in Wellington after leaving the official cash rate at 2.5 percent. Inflation will take longer to reach the bank’s 1-3 percent target than previously expected, he said.

Wheeler has scope to cut borrowing costs to a fresh record low after consumer prices fell in the fourth quarter, pushing the inflation rate down to 0.1 percent, the weakest since 1999. Slumping prices for dairy products, New Zealand’s biggest export, have also curbed economic growth. Fonterra Cooperative Group today forecast its 2016 payout to farmers will fall to a 9-year low.

“The RBNZ is very conscious of the growing downside risk to the inflation environment,” Nick Tuffley, chief economist at ASB Bank in Auckland, said in an e-mail. “We continue to expect the RBNZ to cut the OCR 50 basis points in 2016, starting from June.”

Kiwi Drops

New Zealand’s currency fell after the RBNZ’s statement. It bought 64.34 cents at 10:27 a.m. in Wellington, down from 64.82 cents before the decision.

While there has been some easing in financial conditions in recent weeks as the currency has declined, “a further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices,” Wheeler said Thursday.

Wheeler cut rates four times between June and December, reversing a 2014 tightening. He said Dec. 10 the RBNZ expected to achieve its inflation target without further changing policy settings “although the bank will reduce rates if circumstances warrant.”

This month’s consumer prices report was well below market and RBNZ expectations, stoking bets on further rate cuts. Financial markets are now pricing a 64 percent chance of a rate reduction by June, according to swaps data compiled by Bloomberg. That’s up from 26 percent at the start of the year.

Below Target

Annual inflation has been less than 1 percent for five straight quarters. Economists at ASB Bank expect it won’t reach the target band until the third quarter this year, while counterparts at Bank of New Zealand and ANZ Bank forecast a return in the fourth quarter.

The RBNZ in December predicted a return to the target band in the first quarter of this year. Inflation is expected to accelerate over 2016 “but take longer to reach the target range than previously expected,” Wheeler said Thursday. Core inflation is consistent with the target range and inflation expectations are stable, he said.

All 16 economists surveyed by Bloomberg forecast today’s rate decision. Six tipped the central bank would have lower rates by June 30.

Wheeler has been reluctant to cut rates further as Auckland’s property boom spreads, posing a risk to financial stability, and as economic growth shows signs of recovering from a mid-year dip.

‘Stability Risk’

Nationally, house prices rose 14.2 percent in December from a year earlier, with acceleration in some North Island cities even as Auckland values moderated, property research firm Quotable Value New Zealand said this month.

“House price inflation in Auckland remains a financial stability risk,” Wheeler said. “There are signs that the rate of increase may be moderating but it is too early to tell. House price pressures have been building in some other regions.”

Economic growth is expected to pick up in 2016 led by immigration, tourism, construction and a lift in business and consumer confidence, he said.

Business confidence rebounded in the fourth quarter while net immigration was a record in November. The manufacturing industry expanded at the fasted pace in 14 months in December.

Wheeler said there are many risks around the outlook, including the prospects for global growth, particularly relating to China, and financial market conditions. The central bank will also be watching dairy prices, immigration and pressures in the housing market, he said.

Fonterra, the world’s largest dairy exporter, today cut its estimated payout for the 2015-16 season to NZ$4.15 ($2.67) a kilogram of milksolids from NZ$4.60, citing a global glut.

“We will continue to watch closely the emerging flow of economic data,” Wheeler said.

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