Wednesday, December 9, 2015

New Zealand cuts rate by 25 bps, to cut more if needed

     New Zealand's central bank cut its benchmark Official Cash Rate (OCR) by a further 25 basis points to 2.5 percent, as expected by many, and said it will reduce the rate further if needed.
     The Reserve Bank of New Zealand (RBNZ), which has now cut its rate by 100 basis points this year in response to a weakening economy and low inflation, added it expects to reach its target of inflation near 2 percent with the current OCR but would keep a close eye on the economy.
    The rate cut was expected by most economists and follows the central bank's guidance in September that "some further easing in the OCR seems likely," depending on fresh data.
     In its latest quarterly policy statement, the RBNZ maintained its forecast for the 90-day bill rate - an indicator of the OCR rate - to be 2.8 percent in March 2016 and 2.6 percent in December next year and remaining at that level through December 2018.
    Inflation, however, was seen at 0.4 percent in December this year, down from the September forecast of 0.5 percent, and then only rising to 1.6 percent by December 2016 compared with the previous forecast of 2.2 percent.
    In his statement, RBNZ Governor Graeme Wheeler voiced displeasure with the recent rise in the exchange rate of the New Zealand dollar, known as the kiwi, saying this rise was "unhelpful and further depreciation would be appropriate in order to support sustainable growth."
    The kiwi started depreciating in July 2014 and fell to almost 1.60 to the dollar by late September. But since then it has risen, quoted at 1.49 today, down 14 percent since the start of this year.
    New Zealand's inflation rate was steady at 0.4 percent in the third and second quarters of this year, below the RBNZ's 1-3 percent target range, mainly due to past strength in the kiwi and the 65 percent fall in world oil prices since mid-2014.
    The central bank expects inflation to move into its target by March next year as the drop in petrol prices drops out of the comparison and the decline in the kiwi is reflected in higher import prices.
    Wheeler reiterated his concern over high house prices in Auckland, saying this posed a risk to financial stability though he also said there were signs that house price inflation may be moderating.

    The Reserve Bank of New Zealand issued the following statement by its governor Grame Wheeler.

"The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 2.5 percent.
Globally, economic growth is below average and inflation is low, despite highly stimulatory monetary conditions. Financial markets remain concerned about weaker growth in emerging economies, particularly in China. Markets are also focused on the expected tightening of policy in the United States and the prospect of an increasing divergence between monetary policies in the major economies. 
Growth in the New Zealand economy has softened over 2015, due mainly to lower terms of trade. Combined with increases in the labour supply from strong net immigration, the slowdown has seen an increase in spare capacity and unemployment. A recovery in export prices, the recent lift in confidence, and increasing domestic demand from the rising population are expected to see growth strengthen over the coming year. 
The New Zealand dollar has risen since August, partly reversing the depreciation that occurred from April. The rise in the exchange rate is unhelpful and further depreciation would be appropriate in order to support sustainable growth. 
House price inflation in Auckland remains high, posing a financial stability risk. Residential building is accelerating, and recent tax and LVR measures are expected to reduce housing pressures. There are some early signs that Auckland house price inflation may be moderating. 
CPI inflation is below the 1 to 3 percent target range, mainly due to the earlier strength in the New Zealand dollar and the 65 percent fall in world oil prices since mid-2014. The inflation rate is expected to move inside the target range from early 2016, as earlier petrol price declines will drop out of the annual calculation, and the lower New Zealand dollar will be reflected in higher tradables prices. 
There are a number of uncertainties and risks to this outlook. In the primary sector, there are risks that dairy prices remain weak for longer, and the current El Niño results in drought conditions and weaker output. Risks to the domestic outlook include the prospect of net immigration staying high for longer and of household expenditure picking up on the back of strong house prices. 
Monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range. We expect to achieve this at current interest rate settings, although the Bank will reduce rates if circumstances warrant. We will continue to watch closely the emerging flow of economic data."


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