Wednesday, June 8, 2016

New Zealand holds rate, confirms it may ease further

    New Zealand's central bank left its benchmark Official Cash Rate (OCR) at 2.25 percent, as expected by most analysts, and reiterated its guidance from April that its policy will remain accommodative and "further policy easing may be required to ensure that future average inflation settles near the middle of the target range."
    The Reserve Bank of New Zealand (RBNZ), which surprised financial markets by cutting its rate by 25 basis points in March, also repeated its call for a lower exchange rate of the New Zealand dollar, known as the kiwi, to help boost inflation and make the country's exports more competitive.
    The kiwi started depreciating in July 2014 and fell to a low of almost 1.60 to the U.S. dollar in September last year, a level not seen since 2009.
    Since then, it has steadily firmed and was trading at 1.42 to the dollar today, up from 1.46 at the start of this year, or by 2.8 percent, as speculation mounts that the U.S. Federal Reserve won't cut rates at its next meeting on June 15.
    RBNZ Governor Graeme Wheeler said the central bank expects inflation to strengthen in light of the bank's accommodate policy, higher fuel and commodity prices and "an expected depreciation in the New Zealand dollar" and some increase in capacity pressures.
    New Zealand's inflation rate rose to 0.4 percent in the first quarter of this year from 0.1 percent in the final 2015 quarter but remains far below the RBNZ's target of 2.0 percent, plus/minus 1 percentage point.
    In its June monetary policy statement, the RBNZ maintained its forecast for consumer price inflation to average 0.4 percent this year but raised the 2017 forecast to 1.5 percent from 1.3 percent forecast in March. For 2018 the central bank forecast inflation of 2.1 percent  and 1.9 percent in 2019 compared with its previous forecast of 2.0 percent and 2.0 percent.
    The central bank's forecast for the 90-day rate, a proxy for the OCR, was seen averaging 3.0 percent this year, unchanged from the previous forecast, with the forecasts for 2017, 2018 and 2019 also unchanged at 2.3 percent, 2.1 percent and 2.1 percent, respectively.
    Economic growth in New Zealand was seen averaging 2.4 percent this year, down from 3.6 percent in 2015, but slightly up from 2.3 percent forecast in March. In 2017 growth is seen rising to 3.2 percent, up from 3.1 percent previously forecast, and then by 3.0 percent in 2018 and 2.1 percent in 2019.

    The Reserve Bank of New Zealand issued the following statement by its governor, Graeme Wheeler:

"The Reserve Bank today left the Official Cash Rate unchanged at 2.25 percent.
Global financial market volatility has abated and the outlook for global growth appears to have stabilised after being revised down successively over recent quarters. There has been a modest recovery in commodity prices in recent months. However, the global economy remains weak despite very stimulatory monetary policy and significant downside risks remain. 
Domestic activity continues to be supported by strong net immigration, construction, tourism and accommodative monetary policy. The dairy sector remains a moderating influence with export prices below break-even levels for most farmers.
The exchange rate is higher than appropriate given New Zealand’s low export commodity prices. Together with weak overseas inflation, this is holding down tradables inflation. A lower New Zealand dollar would raise tradables inflation and assist the tradables sector.
House price inflation in Auckland and other regions is adding to financial stability concerns. Auckland house prices in particular are at very high levels, and additional housing supply is needed. 
There continue to be many uncertainties around the outlook. Internationally, these relate to the prospects for global growth and commodity prices, the outlook for global financial markets, and political risks. Domestically, the main uncertainties relate to inflation expectations, the possibility of continued high net immigration, and pressures in the housing market. 
Headline inflation is low, mostly due to low fuel and other import prices. Long-term inflation expectations are well-anchored at 2 percent. After falling in recent quarters, short-term inflation expectations appear to have stabilised. 
We expect inflation to strengthen reflecting the accommodative stance of monetary policy, increases in fuel and other commodity prices, an expected depreciation in the New Zealand dollar and some increase in capacity pressures. 
Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data."



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