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RBNZ's Wheeler keeps OCR at 2%

Thursday 22 September 2016 09:17 AM

RBNZ's Wheeler keeps OCR at 2%, maintains easing bias to try to spur inflation

By Paul McBeth

Sept. 22 (BusinessDesk) - Reserve Bank governor Graeme Wheeler kept the official cash rate at 2 percent and said more easing will be needed to get inflation back within the target band.

"Although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations," Wheeler said in a statement. "Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range."

Last month, Wheeler indicated he had at least another rate cut up his sleeve when lowering the OCR, and that how the economic data played out would determine whether more or less stimulus was required, a rider he kept in today's review.

The RBNZ wants to avoid subdued inflation expectations bedding in, a task made difficult by a strong kiwi dollar making imports cheaper, while a rampant housing market means lowering rates too much could destabilise the financial system.

Wheeler today said headline inflation was still being pushed down by the tradable component, which is linked to the currency's strength and would weaken in the September quarter due to a cut in Accident Compensation Corp levies and cheaper petrol. Government data show consumer prices rose an annual 0.4 percent in the June quarter, the seventh quarter below the Reserve Bank's 1-to-3 percent target band.

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"Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, reduced drag from tradables inflation, and rising non-tradables inflation," he said.

Traders were pricing in a 24 percent chance of a cut leading up to the announcement, and just one of 18 economists surveyed by Reuters was picking the rate to go lower today.

The kiwi slipped to 73.36 US cents from 73.51 cents before the release, and the trade-weighted index decreased to 77.92 from 78.09. The TWI has been trading above the RBNZ's August projections as a stronger than expected economy and recovery in dairy prices have added to the international demand for the kiwi which is underpinned by the country's relatively high interest rates.

Wheeler said the currency was higher than assumed in the August forecasts due to low interest rates around the world, weak global conditions and "may partly reflect improved export prices", but was continuing to weigh on export and import-competing sectors.

"A decline in the exchange rate is needed," he said.

Wheeler said economic growth was in line with the bank's expectations, supported by strong inbound migration, building activity, tourism and low interest rates, though the dairy sector's outlook was "very uncertain".

(BusinessDesk)

ends

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