Tuesday 11 October 2016 04:38 PM
RBNZ's McDermott affirms rate cut bias to stoke moribund inflation
By Paul McBeth
Oct. 11 (BusinessDesk) - The Reserve Bank still expects to cut interest rates further to try and stir inflation that's been kept low by a weak global economy, though the bank isn't concerned that consumer prices will start falling, says assistant governor John McDermott.
In a speech to the Bay of Plenty Employers and Manufacturers' Association in Rotorua, McDermott said monetary policy will continue to be accommodative for the time being, and on current projections more easing is needed to lift the consumers price index. The bank's forecast for annual inflation in the September quarter is 0.2 percent, though its margin of error means annual CPI could be between zero and 0.5 percent, before rising to the lower end of bank's 1-to-3 percent target band in the December quarter, he said. Annual CPI was at 0.4 percent in the June quarter.
"Interest rates are at multi-decade lows, and 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," McDermott said.
The kiwi fell almost half a US cent after the release of the speech notes and recently traded at 70.64 US cents.
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.
McDermott said monetary policy has long lags which is why they target inflation a year or two ahead, and "lowering interest rates now would do little to change" near-term inflation.
A weak global economy has spurred low interest rates around the world and prompted central banks to take unprecedented quantitative easing programmes, which has stoked demand for the New Zealand dollar, which McDermott said was a key factor in headline inflation remaining subdued. At the same time, a slump in global oil prices made fuel cheaper, but doesn't appear to have made a "material or permanent change" in domestic inflation, he said.
Record migration expanding the labour supply has made New Zealand's economy able to grow at a faster pace without generating significant inflation, which McDermott said was a "key structural development" in driving persistently weak inflation.
Despite these changes, the bank doesn't see "any significant risk of deflation in New Zealand", which typically causes consumers and businesses to delay buying things or investing, leading to further price declines, he said.
"Deflation is particularly concerning as monetary policy eventually reaches a point where it cannot go any lower in order to stimulate the economy," he said.