Wheeler downplays scope for 'large' rates fall; kiwi gains

Wednesday 29th July 2015

Reserve Bank governor Graeme Wheeler says some market commentators are predicting further declines in interest rates that would only make sense for an economy in recession, although some easing is likely to be needed to maintain New Zealand's economic growth.

Wheeler gave a balanced view of the economy in a speech to an ExportNZ/Tauranga Chamber of Commerce meeting. While repeating that further depreciation in the New Zealand dollar is necessary "given the weakness in export commodity prices and the projected deterioration in the country’s net external liabilities over the next two years," he also noted several factors supporting the economy - "the easing in monetary conditions, continued high levels of migration and labour force participation, ongoing growth in construction, and continued strength in the services sector.”

"Some local commentators have predicted large declines in interest rates over coming months that could only be consistent with the economy moving into recession," he said in speech notes posted on the central bank's website.

The kiwi dollar climbed to 67.20 US cents after the speech was released, from 66.84 cents immediately before. The trade-weighted index jumped to 71.55 from 71.04.

Wheeler cut the official cash rate a quarter point to 3 percent last week, the second 25 basis point cut in two months, and flagged further declines. Bank economists have predicted he will cut the rate to 2.5 percent this year, with some saying he may have as much as 1 percentage point of cuts up his sleeve.

Wheeler said today that the exchange rate "remains above the level consistent with current economic conditions" and that there is potential for further downward pressure on prices of dairy products, the nation's biggest export. But a decline in the currency may be assisted by factors outside his control, including that the US Federal Reserve and the Bank of England are likely to begin the process of normalising their interest rates, "which could assist our currency lower,” Wheeler said.

New Zealand's annual inflation is just 0.3 percent - below the bank's 1 percent to 3 percent target band. Wheeler said today that annual CPI inflation is expected to be close to the midpoint of the band by the first half of 2016.

“Under the bank’s flexible inflation targeting framework, the policy targets agreement specifically recognises that annual CPI inflation will fluctuate around the medium term trend due to factors such as exceptional movements in commodity prices – like those experienced since mid 2014,” Wheeler said.

"There are, however, several risks and uncertainties around the inflation outlook. These include the future path of the exchange rate, which will be influenced by future commodity prices, and the speed with which the recent depreciation feeds through to higher inflation.”

BusinessDesk.co.nz

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