Wheeler Says RBNZ Likely Done Cutting Rates as Economy Grows

  • Trend of upward pressure on NZ dollar ‘may finally be turning’
  • Wheeler reiterates RBNZ sees balance of risks on the downside

Graeme Wheeler.

Photographer: Mark Coote/Bloomberg

New Zealand central bank Governor Graeme Wheeler said interest rates are probably low enough to return inflation to his 2 percent goal amid a robust economic expansion.

The Reserve Bank indicated last month that its official cash rate is likely to remain at a record-low 1.75 percent for some time, and latest developments “do not cause us to change our view,” Wheeler said in a speech posted on the RBNZ’s website Thursday. “We expect monetary policy to continue to be accommodative, and that the projected policy settings will help generate sufficient growth to have inflation settle near the middle of the target range.”

New Zealand’s economy is growing at an annual pace of around 3.5 percent, building pressure on inflation which has languished below the RBNZ’s 1-3 percent target band for two years. Wheeler has cut borrowing costs seven times since June 2015 in an effort to stoke price increases by boosting domestic demand, and to contain the strong local currency.

Wheeler said today “the exchange rate is higher than the economic fundamentals would suggest is appropriate,” but the global forces that have boosted the kiwi dollar may be abating.

“Monetary policy has been made more challenging in New Zealand by low global inflation and zero or negative policy rates in several major economies,” he said. “This has put downward pressure on our interest rate structure and contributed to asset price inflation and upward pressure on the New Zealand dollar. This trend may finally be turning.”

Downside Risks

The kiwi dollar rose on Wheeler’s comments, to 71.65 U.S. cents at 10 a.m. in Wellington from 71.50 cents before his speech was published.

“Today’s speech had little impact on our view for monetary policy settings in New Zealand,” said Zoe Wallis, chief economist at Kiwibank Ltd. in Wellington. “We maintain our expectation that the OCR will be on hold at 1.75 percent for the next few years.”

Still, Wheeler reiterated that the central bank’s projections were “highly conditional” and that different outcomes “could imply a different policy path.” The RBNZ assesses the overall balance of risks “to be on the downside,” he said.

In an interview after the RBNZ’s last rate reduction on Nov. 10, Assistant Governor John McDermott said the bank was worried about the strong kiwi dollar, which has suppressed import prices, and would cut its benchmark again if needed.

However, the bank expects growth to accelerate to 3.9 percent in the year to March, driven by construction, immigration, tourism and low borrowing costs.

In the absence of major unanticipated shocks, “prospects look good for continued strong growth over the next 18 months,” Wheeler said today. The low point for inflation, currently running at 0.4 percent, “has probably passed,” he said.

Wheeler also reiterated that the bank remains concerned about the booming housing market, which has been fueled by record-low borrowing costs. “House-price inflation is much higher than desirable and poses concerns for financial stability,” he said.

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