Wheeler Signals RBNZ Won't Rush to Cut Rates on Low Inflation

  • Inappropriate to offset low oil price through rate cuts
  • Further easing my be needed if global economic concerns deepen

New Zealand’s central bank signaled it won’t rush to cut its official cash rate further as inflation hovers near zero, saying it has the flexibility to look through the oil-price slump.

“It would be inappropriate to attempt to offset the low oil price effect through the OCR,” Governor Graeme Wheeler said in a speech Wednesday. However, “if concerns deepen around the prospects for the global economy and its impact on New Zealand, some further policy easing may be needed over the coming year.”

Wheeler cut the official cash rate four times last year to a record-low 2.5 percent. Inflation slowed to 0.1 percent in the fourth quarter as oil prices tumbled and Wheeler reiterated today it will take longer for it to return to the bank’s 1-3 percent target than previously expected.

“You don’t want to have knee-jerk reactions to headline inflation, particularly when you know there are a number of anomalies driving it lower,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “We have very low global inflation, in part driven by commodity prices, being imposed on New Zealand. Why fight a battle that you can’t win?”

New Zealand’s currency rose after the speech, buying 65.35 U.S. cents at 2:24 p.m. in Wellington.

Low Oil

Low oil prices are recognized in RBNZ’s Policy Targets Agreement with the government “as a factor that can legitimately cause inflation to be outside the target band,” Wheeler said.

Measures of core inflation and inflation expectations are more consistent with the bank’s goal of keeping the annual pace of price increases around 2 percent over the medium term, he said. The central bank’s sectoral factor model showed core inflation was 1.6 percent in the fourth quarter, while inflation expectations gauges are averaging 2 percent, Wheeler said.

“Our goal is to anchor inflation expectations close to the midpoint to the price stability target range,” he said. “We would not wish to see inflation expectations become unstable or decline significantly.”

Wheeler said economic growth is forecast to return to 3 percent and inflation is projected to accelerate, but most of the risks to the economy are to the downside including a weak global environment, low dairy prices and strong immigration.

“In managing economic risks and assessing monetary policy we will continue to draw on the flexibility contained in the PTA and avoid taking a mechanistic approach,” he said.

Such an approach “could lead to an inappropriate fixation on headline inflation” and “risks creating serious distortions in the financial system, housing market and broader economy,” Wheeler said.

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