Inflation accelerating; kiwi jumps

Thursday 09 June 2016 09:44 AM

RBNZ's Wheeler keeps OCR at 2.25%, sees inflation accelerating; kiwi jumps

By Paul McBeth

June 9 (BusinessDesk) - Reserve Bank governor Graeme Wheeler left the official cash rate unchanged, saying he expects an eventual pickup in inflation as the New Zealand dollar falls, oil and dairy prices rise, and capacity pressures increase. The kiwi dollar jumped to the highest level in almost 12 months after his statement.

"We expect inflation to strengthen reflecting the accommodative stance of monetary policy, increases in fuel and other commodity prices, an expected depreciation in the New Zealand dollar and some increase in capacity pressures," Wheeler said in a statement. "Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range."

Wheeler kept the OCR held at 2.25 percent and left the forecast track for the 90-day bank bill rate, seen as a proxy for the OCR, largely unchanged, with a projection it will fall to 2.1 percent in the June 2017 quarter from 2.6 percent in the first three months of this year.

In deciding against cutting the OCR today, the central bank said the stimulus from such a move "would generate more volatility in non-tradables inflation and output than is necessary".

Economists were picking the OCR to remain unchanged and traders were pricing in a 22 percent chance of a cut as New Zealand's booming construction and tourism sectors and rapid inbound migration continue to support the wider economy.

The kiwi jumped as high as 71.16 US cents, recently trading at 70.86 cents from 70.18 cents immediately before the release.

The central bank faces a dilemma in setting interest rates to influence inflation. Keeping rates high boosts the kiwi dollar, which keeps imported inflation in check, while lower rates mean cheaper mortgages, which could further inflame the housing market.

Wheeler today said "the exchange rate is higher than appropriate given New Zealand’s low export commodity price" and "a lower New Zealand dollar would raise tradables inflation and assist the tradables sector."

The trade-weighted index averaged 75.94 through the March quarter, above the central bank's projected 72.3 average, and climbed to 75.18 from 74.41 before the release. The bank raised its projected averages for the TWI, and now sees it falling below 70 in December next year having previously though it fall through that level in the 2017 June quarter.

Wheeler said headline inflation remained low due to cheap petrol and other imports, but short-term inflation expectations had stabilised having dropped to a 22-year low earlier this year.

Inflation has consistently undershot analysts' forecasts due to the strength of the kiwi dollar and an expanding labour supply that has reduced pressures to drive up wages. The annual pace of inflation was running at 0.4 percent in the March quarter, and the central bank expects it will get back within the 1-percent-to-3-percent target band in the December quarter, before reaching the 2 percent midpoint it aims for in December next year.

The other issue Wheeler has had to grapple with is a booming property market, driven by the strong migration figures and a shortage of housing stock in the country's biggest city of Auckland. Quotable Value data this month showed property values rose at an annual pace of 12 percent in May, largely unchanged from April.

Wheeler said Auckland house prices added to financial stability concerns - a factor the bank takes into account when setting monetary policy - with Auckland prices at "very high levels" and additional supply still needed.

(BusinessDesk)

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