Wheeler says inflation, commodities, kiwi key to rate track

RBNZ's Wheeler says inflation indicators, commodities, currency are key to interest rate track

By Paul McBeth

June 11 (BusinessDesk) - Reserve Bank governor Graeme Wheeler is watching a number of indicators including inflation signals, commodity prices and the falling currency in gauging whether to cut interest rates again.

The central bank today cut the official cash rate a quarter-point to 3.25 percent, surprising some market participants who were expecting Wheeler to wait for more data before moving. The governor said the sharp drop in dairy prices had meant the decline in New Zealand's terms of trade was more pronounced than previously thought and that he needed to act to prevent an extended period of inflation hovering below the bank's 1 percent to 3 percent target band.

The Reserve Bank cut the track of the 90-day bank bill rate, often seen as a proxy for the OCR, by more than half a percentage point, seeing it to 3.3 percent in the December quarter of this year, and bottoming out at 3.1 percent in June 2016 where it stays over the bank's forecast horizon until June 2017.

In deciding whether to cut the key rate again, Wheeler told Parliament's finance and expenditure committee he would be monitoring wage pressures, inflation signals and expectations, economic growth, commodity prices and the exchange rate, which he singled out as key to stoking inflation.

"If you look at inflation in the economy, you're basically seeing negative tradable inflation for the better part of three years, partly because of low overseas inflation and partly because of the high exchange rate," Wheeler said. "The exchange rate becomes an important transmission mechanism to raise inflation, but it's basically been pulling down inflation quite dramatically, so to the extent that we see further exchange rate depreciation that will help raise tradable inflation, that would be a good thing."

Government data showed annual inflation rose 0.1 percent in the year through March, with tradable consumer prices falling 2.8 percent on an annual basis.

The New Zealand dollar dropped almost 2 US cents after the rate cut, recently trading at 70.28 cents, and the currency plunged more than 2 Australian cents to recently trade at 90.45 Australian cents after upbeat employment figures across the Tasman further supported the Australian dollar against its kiwi counterpart.

The trade-weighted index has dropped 9.8 percent to 73.27 since April 23, when assistant governor John McDermott delivered a public speech indicating the bank's easing bias, taking rate hikes off the table. Wheeler today dropped his previous reference to the currency being unjustifiably and unsustainably high, criteria for the regulator to intervene in foreign exchange markets.

Wheeler welcomed the recent depreciation in the currency, though said it was still overvalued and that its depreciation still "has a significant way to go."

When questioned about competing tensions between the bank's price stability target and managing the nation's financial stability, Wheeler said the bank tries to see how monetary policy can support macro-prudential tools and vice versa, "but there will be situations where there may be a potential conflict."

Wheeler said rapid house price inflation has largely been contained within Auckland, with the rest of the country running at a more reasonably level, and that improving "supply is just a critical part of the equation there."

(BusinessDesk)

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