New Zealand central bank sees signs of increased economic growth

The New Zealand dollar rose against the US dollar ahead of a speech by Reserve Bank governor Graeme Wheeler on Wednesday and a US interest rate review at the end of the week.

However, according to Reserve Bank of New Zealand governor Graeme Wheeler these predictions may be just a little too pessimistic, in his opinion at least.

Wheeler stated that in returning inflation to the RBNZ’s mid-point, around 2%, the bank was aiming to avoid unnecessary volatility in output, interest rates and the exchange rate.

But Gordon said Westpac remained “comfortable” calling for a low point of of 2 per cent for the official cash rate.

“But neither of those will happen if the Reserve Bank cuts the OCR by only another quarter per cent or so”, Gordon said.

Contrary to this, the RBNZ believes several factors are supporting economic growth.

While the central bank’s models suggest the real exchange rate is now in the vicinity of its long-run equilibrium value, it “remains above the level consistent with current economic conditions and, in particular, the current low level of export prices“. The latest cuts mark a reversal for New Zealand, which had been an outlier in a world where interest rates – including in the US, Japan and Europe – remain at ultra-low levels. Export prices for whole milk powder have fallen 63 percent since February 2014, and oil prices are now more than 50 percent below their June 2014 level.

“While we understand the positive NZD reaction to today’s speech…in which he decried some of the more extreme market forecasts for the extent to which the OCR could be further cut, Wheeler made clear that further exchange rate depreciation is both required and expected”, said Ray Attrill, global co-head of FX strategy at NAB. They included easing monetary conditions, continued high levels of migration and labour force participation, ongoing growth in construction, and continued strength in the services sector.

Wheeler is expected to speak on the outlook for New Zealand’s economy.

The RBNZ will be reviewing its growth forecasts in the September monetary policy statement.

The RBNZ has been challenged by a near 40 percent fall in prices for key dairy exports so far this year, wiping billions from the economy, while business and consumer sentiment have sunk to three-year lows, while the economy slows.

Lower interest rates could exacerbate the existing housing pressures in Auckland by further stimulating housing demand.

However, a fall in the exchange rate would generate only a transitory burst of inflation, Mr Gordon said.

“The bank continues to be concerned about the financial stability risks and risks to the broader economy that would be associated with a major correction in Auckland house prices”, Wheeler said. The proposed LVR measures and the Government’s policy initiatives that it announced in the 2015 Budget should begin to ease the impact of investor activity.