Low Inflation Set To Trigger RBNZ Cut

ASB senior economist Jane Turner said the Reserve Bank made very strong comments about the strength of the New Zealand dollar, quoting the bank saying “it makes it hard for the bank to meet its inflation objective”; which is midway of its target range of 1%-3%.

The RBNZ continues to be open and transparent about the limited tools that it has at its disposal, and the need for broad-based assistance from policy makers. That will be the benchmark as to when the Bank of Japan decides to get involved either through quantitative easing, or possible currency intervention although the intervention part of that equation has become less likely of the last couple of weeks. It is expected to cut OCR during its August Monetary Policy Statement, noted Westpac in a research report.

It warns significant downside risks remain.

Turner said this week’s announcement that LVR restrictions will be tightened should help the Reserve Bank’s reluctance to cut interest rates further.

On domestic growth front, the central bank anticipates construction activity, solid inward migration, accommodative monetary policy and tourism to underpin the growth. However, low dairy prices are depressing incomes in the dairy sector and weighing on farm spending and investment. Without imposing restrictions, the central bank could risk an economic recession if a housing bubble bursts. Globally, the uncertainties relate to the global growth and commodity prices outlook, political risks and fragility of global financial markets.

New Zealand house prices have increased by around 50 per cent since 2010, driven by strong immigration, low mortgage rates and sluggish housing supply.

The bank repeated its message that a decline in the exchange rate was needed.

“The RBNZ is between a rock and a hard place at the moment”, he added referring to a booming housing market that is causing financial stability concerns on the one hand and below-target inflation on the other. “But we also feel that it would take a meaningfully lower OCR (to well below 2 per cent) to really alter what is still a solid backdrop for the NZD”.

The RBNZ today said “further easing is likely”, with the currency 6 percent above forecasts in its June monetary policy statement forecasts on a trade-weighted basis. We will continue to watch closely the emerging economic data, governor Graeme Wheeler said in a statement this morning.