RBNZ Says Lower Rates Will Likely Be Needed; Currency Slumps

RBNZ Flags Future Cash Rate Cuts
  • Currency gain makes it difficult to meet inflation objective
  • Rate will eventually drop to 1.5 percent: Capital Economics

New Zealand’s central bank said further monetary easing is probably needed to lift inflation, reinforcing expectations of an interest-rate cut next month. The currency fell to a six-week low.

“At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range,” the Reserve Bank of New Zealand said in a statement Thursday in Wellington. The comments stoked expectations of deeper cuts in the official cash rate to as low as 1.5 percent next year from 2.25 percent currently.

RBNZ Governor Graeme Wheeler earlier this week announced plans to tighten restrictions on home lending, giving himself more room to cut the cash rate from an already record low to tackle persistently weak inflation. The RBNZ’s reluctance to fuel a housing boom with lower borrowing costs has boosted the currency and damped import prices, making it harder to return inflation to its 1-3 percent target band.

“It is clear from today’s statement that the RBNZ intends to lower rates to weaken the exchange rate,” Paul Dales, chief Australia and New Zealand economist at Capital Economics said in an emailed note. “The stronger dollar and weak inflation climate have led us to conclude that interest rates will now eventually be reduced to at least 1.5 percent.”

Kiwi Falls

The kiwi dollar fell as much as 1 percent after the statement to the lowest since June 7. It bought 69.66 U.S. cents at 11:54 a.m. in Wellington from 70.26 cents immediately before the release. Two-year swap rates fell to a record-low 2.05 percent.

Thursday’s statement was an assessment of economic conditions and not a review of the official cash rate, which isn’t scheduled until Aug. 11. There is a 90 percent chance of a cut at that review, according to swaps data compiled by Bloomberg. The benchmark was last lowered in March.

The central bank’s comment today that easing is “likely” contrasts with Wheeler’s June 9 statement that a rate cut “may be” required.

“The RBNZ’s thinking has changed markedly” from June, Jane Turner, senior economist at ASB Bank Ltd. in Auckland, said in an e-mailed note. “It appears more comfortable to react to the low inflation outlook.”

Decline Needed

The currency’s strength “is adding further pressure to the dairy and manufacturing sectors and, together with weak global inflation, is holding down tradable goods inflation,” the central bank said. “This makes it difficult for the bank to meet its inflation objective. A decline in the exchange rate is needed.”

Consumer prices rose 0.4 percent in the second quarter from a year earlier, less than the RBNZ had forecast. Inflation has been less than 1 percent since the fourth quarter of 2014 and below 2 percent since late 2011.

While long-term inflation expectations are well-anchored at 2 percent, short-term expectations remain low, the bank said today. The outlook for prices has weakened since June due to the strong exchange rate, it said.The statement didn’t contain new forecasts.

House Prices

The RBNZ also commented on house prices Thursday, after this week proposing that property investors across New Zealand must have a deposit of at least 40 percent from Sept. 1 to acquire a mortgage. That tightens an existing requirement that investors in Auckland, home to a third of New Zealand’s population, put down at least 30 percent.

The new rules recognize that a housing boom in Auckland has spread to other centers and there is a risk of a sharp correction that could harm the banking system, Wheeler said Tuesday.

“House-price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability,” the RBNZ said today.

New Zealand’s economy is expected to remain supported by strong inward migration, construction activity, tourism and low interest rates, the RBNZ said. Still, “low dairy prices are depressing incomes in the dairy sector and weighing on farm spending and investment,” it said.

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