bizEDGE NZ - Tepid inflation surprise raises spectre of lower interest rates

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Tepid inflation surprise raises spectre of lower interest rates

Any further downward surprises in New Zealand's already tepid pace of consumer inflation may warrant an interest rate cut, the Reserve Bank says.

Governor Graeme Wheeler left the official cash rate unchanged at 3.5 percent, while stripping out any projected hikes from the bank's forecast horizon as a slump in global oil prices keeps a lid on wage and price pressures, by making businesses input costs cheaper. The bank is closely watching firms' behaviour, and while it can look through the recent slide in oil prices as a near-term shock, if that saps inflationary pressures further, or if the prices decline, the bank may need to cut the benchmark rate, it said in today's quarterly monetary policy statement.

"It is possible that price- and wage-setting behaviour responds differently to what is currently assumed," the central bank said. If inflation expectations settled near a 1 percent pace, rather than the assumed 2 percent, "it would be necessary for the 90-day rate to be lower than currently projected.

"A significant reduction in inflation expectations would warrant more supportive monetary policy," says the MPS in code that means interest rates would need to fall.

The bank expects the 90-day bank bill rate, often seen as a proxy for the official cash rate, to remain unchanged at 3.7 percent until March 2017, the end of its forecast horizon, having previously predicted it would rise to 4.5 percent by the end of that year.

The Reserve Bank is still assessing its assumptions, having already been surprised by the lack of inflation in the face of high inbound migration, a strong property market and robust economic growth. That includes its view on what is a neutral interest rate level.

"At this point in time, we view the stance of monetary policy as remaining in stimulatory territory: the steady absorption of productive resources is consistent with the decline in the unemployment rate, the increase in the quarterly survey of business opinion, survey measures of capacity pressures and the steady increase in our estimate of the output gap," it said.

 

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