RBNZ Has Room to Cut If Brexit Unrest Worsens, English Saysby and
Finance minister says New Zealand well placed to weather storm
Brexit may buoy NZ dollar by improving relative attractiveness
New Zealand is better placed than most countries to weather any worsening in post-Brexit global turmoil due to its positive growth outlook and ability to cut interest rates, Finance Minister Bill English said.
“If there’s a significantly negative result, we’re in a very small group of countries -- the others being Iceland, South Korea and Australia -- that have got a combination of reasonable government finances, a reasonable growth path, and room for interest rates to move,” English said in an interview Tuesday in Wellington. “It makes you realize how few tools other countries have.”
Britain’s shock decision to exit the European Union has roiled financial markets and increased the likelihood that global growth and inflation will remain subdued. In the wake of the so-called Brexit referendum result last week, investors increased bets that New Zealand’s central bank will cut its cash rate in August from an already record-low 2.25 percent.
“We’ll just have to wait and see” if the Reserve Bank of New Zealand acts at the Aug. 11 decision, English said.
While the New Zealand dollar fell as much as three U.S. cents after the Brexit vote, it’s stronger than it was in June last year despite 125 basis points of RBNZ rate reductions. The kiwi traded at 70.67 U.S. cents at 12:53 p.m. in Wellington.
English said the Brexit fallout may buoy the currency by increasing New Zealand’s relative attractiveness.
“Relative yield in New Zealand just remains better, and that’s held up longer and stronger than people might have expected,” he said. “Brexit won’t have helped in the long run” as it amounts to “another two or three years where the northern hemisphere’s going to be a bit worried and therefore on that low growth path for a bit longer.”
While the strong kiwi is suppressing inflation and increasing pressure on the central bank to cut rates, low borrowing costs are fueling a housing boom.
RBNZ Governor Graeme Wheeler has said the bank is exploring new macroprudential tools such as debt-to-income limits to help quell housing demand. It would need to add them to its Memorandum of Understanding agreement with English before implementation.
“The governor’s indicated publicly that he’s got a bit of work to do on the concept of debt-to-income ratios, so if they feel the need to make any other moves then they’ll probably use the tools they have,” English said. “We haven’t actually agreed to add it yet.”
New Zealand’s economy expanded 2.8 percent in the year ended March and growth is forecast by the central bank to accelerate to 3.4 percent this year. Net government debt is 25 percent of gross domestic product and projected to drop to 20 percent by 2021. The current account deficit, long New Zealand’s Achilles’ heel, is running at 3 percent of GDP.
“We’re fortunate to be in a part of the world where there’s a bit more stability and better growth prospects, something we share with Australia,” English said. He said credit rating companies are “quite positive” on New Zealand’s position and “like the fiscal story.”
“They need to see an extended period of reduced current account exposure, particularly at S&P, before they would consider a more positive outlook,” English said. “That is sort of happening” because the current account “has been consistently better than forecast.”