The Reserve Bank of New Zealand (RBNZ), which cut its rate by 100 basis points in 2015, most recently in December, still expects inflation this year to exceed that of 2015 but expects it to take longer to reach its 1-3 percent target range.
The guidance by the RBNZ is more dovish than in December when the central bank said its policy stance needs to be accommodative to ensure that inflation settles near the middle of its target range and that it "will reduce rates if circumstances warrant."
New Zealand's headline inflation fell to 0.1 percent in the fourth quarter of 2015, the lowest rate seen since a brief stint of deflation in 1999, from 0.4 percent in the two preceding quarters. This was below the central bank's own forecast for fourth quarter inflation of 0.4 percent.
RBNZ Governor Graeme Wheeler said falling fuel prices were the main reason for low inflation but added that core inflation, which excludes temporary price changes, was consistent with the target range at 1.6 percent.
In its December Monetary Policy Statement, the central bank forecast that inflation would start to move into its target range in the first quarter of 2016 as the fall in petrol prices from lower oil prices drops out of the annual comparison and the impact of the depreciation of the New Zealand dollar from April 2015 is passed onto to higher import prices.
In December inflation in the first quarter of this year was seen rising to 1.2 percent and then hitting 1.6 percent by the fourth quarter of this year.
But Wheeler's statement that inflation will take longer to reach the bank's target indicates that bank will cut its forecast for inflation in March when it updates its forecast, paving the way for a rate cut.
Wheeler said uncertainty about the global economy had risen due to weaker growth in emerging markets and China, while the prices of oil and commodities remain weak.
New Zealand's economy softened in the first half of last year but Wheeler still expects growth to rise in 2016 on the back of immigration, tourism, construction activity and improved business and consumer confidence.
New Zealand's Gross Domestic Product expanded by 0.9 percent in the third quarter from the second quarter, above the RBNZ's expectation for 0.6 percent growth. On an annual basis, the economy expanded by 2.3 percent in the third quarter of last year, down from 2.4 and 2.7 percent in the two preceding quarters.
But unemployment also edged higher to 6.0 percent in the third quarter from 5.9 percent in the second and 5.8 percent in the first quarter.
Although financial markets have been volatile this month, Wheeler said financial conditions had recently eased and the New Zealand dollar had declined.
However, Wheeler once again called for "further depreciation in the exchange rate," given the ongoing weakness in export prices, such as dairy products.
The New Zealand dollar, known as the kiwi, started depreciating in July 2014 and fell steadily to February 2015. After a two month rebound, it resumed its decline, falling from April to almost 1.60 to the U.S. dollar by late September 2015.
From September through the end of 2015 the kiwi firmed slightly but still ended up being down 12.3 percent for the entire year.
The kiwi has started the year on a weak footing and was trading at 1.53 to the dollar today, down 4.5 percent since the beginning of 2016. After the RBNZ's statement, it fell further to 1.55.
The Reserve Bank of New Zealand issued the following statement by its governor, Graeme Wheeler: