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PM Key sees inflation heading lower, cuts RBNZ slack for now

Prime Minister John Key expects the annual rate of inflation to fall further than the 0.8 percent recorded in the year to December, but would not be drawn on whether the Reserve Bank should be cutting interest rates sooner rather than later to get inflation back towards its 2 percent annual target.

Speaking at his post-Cabinet press conference and ahead of this Thursday's RBNZ quarterly monetary policy statement, Key said he expected interest rates to "stay lower for quite a lot longer."

"Given you've got inflation at 0.8 percent and potentially lower when then new information comes out, then I think potentially you've got a scenario where it's not an option for the bank to raise interest rates," said Key.

Economists are almost unanimous in the view that RBNZ governor Graeme Wheeler will leave the official cash rate unchanged at 3.5 percent at Thursday's review, but there is a growing expectation priced into bond markets that the RBNZ may end up cutting rates before it next raises them.

Key acknowledged the central bank was also trying to curb the emergence of a bubble in the Auckland residential property market, saying the bank "does have to find other ways potentially in that very benign inflation environment to work out how it can control pressure (on house prices)."

The comments were made in the context of a discussion paper released last week proposing the imposition mid-year of new capital adequacy ratios on bank lending for residential property bought by investors rather than owner-occupiers, a treatment more in line with other banking systems around the world.

The comment caused a brief flurry on currency markets when it was interpreted as meaning the RBNZ could look to a wider range of macro-prudential tools than the loan-to-valuation loan ratios that have been in place since 2013, and last week's proposed new measures.

Asked how long the government would tolerate the RBNZ's monetary policy stance maintaining inflation at well below the 2 percent target, Key said: "Don't know. To cut them a bit of slack, they make their interest rate predictions and changes for inflation view 18 months out.

"I wouldn't be surprised, everything that I see, if inflation's lower. Look at oil prices, they're coming down. The exchange rate's still reasonably strong. Imported inflation looks to me to be pretty low."

On the Northland by-election, where polls show the National Party neck-and-neck with the New Zealand First party in what should be a National safe seat, Key said the campaign was now a case of "us vs. three or four other political parties ganging up on us."

He defended the early announcement today of spending in the electorate to spend between $32 million and $69 million replacing one-lane bridges as necessary in a campaign environment.

"We're in government and we can do things and he (Peters) is in Opposition and he can just yak on about things. There's quite a big difference," said Key, who acknowledged he would need the support of "the next MP for Northland" to pass the government's proposed changes to the Resource Management Act.

However, the draft reforms were unlikely to be ready to go to Cabinet before the March 28 by-election, which could rob the government of its balance of power in the Parliament if it loses and is left with 59 seats in the 212 seat Parliament. It would then require the support of the ACT party's one vote and one other minor party to pass controversial legislation.

The Maori Party already opposes RMA reforms and the one seat United Future party's leader, Peter Dunne, has made it clear the RMA will not have his party's support.