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RBNZ's Wheeler opens door for more rate cuts with inflation set to rise more slowly; kiwi drops

Thursday 28th January 2016

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Reserve Bank governor Graeme Wheeler has opened the door for further interest rate cuts as a worldwide oil glut depresses petrol prices and looks set to keep inflation outside the bank's target band for longer than expected. The kiwi dollar fell.

Wheeler kept the official cash rate at 2.5 percent, saying monetary policy will need to stay loose as inflation takes longer to pick up. Government figures last week showed the consumer prices index was dragged down by cheap fuel, rising just 0.1 percent in 2015. Since then oil prices have dropped to 13-year lows, and Wheeler today said he will continue to monitor the flow of economic data.

"Headline inflation is expected to increase over 2016, but take longer to reach the target range than previously expected," Wheeler said in a statement. "Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range." 

The New Zealand dollar fell to 64.32 US cents from 64.71 cents immediately before the statement was released at 9am.

Last month, the Reserve Bank forecast annual inflation rising back within the 1-to-3 percent target band in the March quarter of this year, due in part to last year's drop in oil prices washing through the data, and projected CPI would creep up to the 2 percent midpoint by December 2017. 

At the time, Wheeler said he was done cutting interest rates with the record-low level enough to spur inflation back within the percent target band, while keeping the caveat that he would act if circumstances warranted. 

Last week's CPI figure undershot the bank's forecast, though Wheeler today said annual core inflation, which strips out temporary price movements, was within the target range, and that inflation expectations were stable. He'll get an opportunity to provide further detail about his view on the economy when he delivers his first public speech to the Canterbury Employers' Chamber of Commerce next week. 

Wheeler said there were still a number of risks threatening the outlook, including the prospects for global growth and China in particular, international financial market conditions, dairy prices, the country's strong net inbound migration, and pressures in the housing market. 

While house price inflation was showing signs of abating since the Reserve Bank imposed lending curbs on investor-buyers and the government rolled out plans to tax property more stringently, Wheeler said it was too early to tell whether the rate of increase was moderating. 

Wheeler said the recent volatility in financial markets had pushed down the kiwi dollar and market interest rates, but "a further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices." 

Prices for whole milk powder, the country's biggest commodity export, have remained soggy in the GlobalDairyTrade auctions, this spurring processors Fonterra Cooperative Group, Westland Milk Products and Open Country Dairy to cut their forecast payout to farmers for the season. 

The weakness in dairy prices prompted Fitch Ratings to lower its outlook on New Zealand's sovereign credit rating to stable from positive when affirming the nation's AA rating. 

The rating agency downgraded its forecast of New Zealand gross domestic product growth due to the downbeat agricultural outlook, putting it at odds with Bank of New Zealand economists who upgraded their forecast on the strength of recent services and manufacturing gauges. 

Wheeler today said New Zealand's economy is expected to pick up this year due to persistently strong inbound migration, high levels of tourism, an elevated level of construction work, and improving business and consumer confidence.

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