RBNZ's Wheeler cuts OCR, signals end to easing cycle

Thursday 10 November 2016 09:21 AM

RBNZ's Wheeler cuts OCR, signals end to easing cycle

By Paul McBeth

Nov. 10 (BusinessDesk) - Reserve Bank governor Graeme Wheeler cut the official cash rate to a new record low to try and stoke inflation in an economy growing ahead of expectations and signalled the end of the easing cycle, pushing the kiwi up.

Wheeler lowered the OCR to 1.75 percent, as expected, and projected the benchmark rate will stay there over the bank's forecast horizon until the end of 2019. The kiwi jumped to 73.37 US cents from 72.90 cents immediately before the release, and the trade-weighted index advanced to 79.11 from 78.59, 3 percent higher than what the RBNZ is projecting for the December quarter.

"Our current projections and assumptions indicate that policy settings, including today’s easing, will see growth strong enough to have inflation settle near the middle of the target range," Wheeler said in a statement. "Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly. "

The RBNZ has been cutting interest rates to try and stoke moribund inflation, which has been leaned on by a strong New Zealand dollar making imported products cheaper. The currency has persistently remained higher than expectations as New Zealand's relatively upbeat economic outlook continues to make it attractive in an uncertain global environment.

Today's decision was complicated by the US presidential election of Donald Trump and the Republican party sweep of both houses of the legislature. The uncertainty over that outcome created volatility in financial markets, though investors pushed up stock markets in response to the vote.

Wheeler again bemoaned the strength of the currency, but stopped short of indicating the Reserve Bank would intervene in foreign exchange markets.

"The exchange rate remains higher than is sustainable for balanced economic growth and, together with low global inflation, continues to generate negative inflation in the tradables sector," he said. "A decline in the exchange rate is needed."

Wheeler said inflation continued to track below expectations due to the tradables sector, and while cheap petrol prices and cuts to Accident Compensation Corp levies weighed on consumer prices in the September quarter, it was still expected to increase in the December period "reflecting the policy stimulus to date, the strength of the domestic economy, and reduced drag from tradables inflation."

The central bank expects the consumers price index to rise to an annual pace of 1.1 percent in the December quarter from the 0.4 percent pace in September, within the bank's target band of between 1 percent-and-3 percent. Inflation is seen reaching the 2 percent midpoint by December 2018, slightly later than what was projected in the August monetary policy statement.

Wheeler said the economy was still being supported by low interest rates, strong population growth, record tourism and building activity, though noted high net migration was still limiting wage growth.

He again said house price inflation was "excessive" and posed risks to the nation's financial stability, and while rising prices in Auckland had moderated, the outlook was uncertain due to the lack of supply in the country's biggest city.

(BusinessDesk)

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