RBNZ’s Wheeler cuts OCR to 3% and flags more to come, says kiwi needs to keep falling

Reserve Bank governor Graeme Wheeler cut the official cash rate a quarter-point to 3 percent and flagged more reductions are likely, while saying a lower kiwi dollar is needed to prop up the nation’s export sector. The New Zealand dollar jumped higher.

“A reduction in the OCR is warranted by the softening in the economic outlook and low inflation,” Wheeler said in a statement. “At this point, some further easing seems likely.”

Wheeler kicked off an easing cycle last month as inflation stayed below his target band and falling dairy prices lead to a deterioration in the country’s terms of trade, forecasting the 90-day bank bill rate, often seen as a proxy for the OCR, would fall to 3.3 percent in the December quarter before bottoming out at 3.1 percent in June 2016. At the time, he told politicians he was watching a number of indicators including inflation signals, commodity prices and the falling currency in gauging whether to cut interest rates again.

Since then, inflation has continued to track below the central bank’s target band, and whole milk powder prices slumped at the most recent GlobalDairyTrade auction, prompting traders to price in an outside chance Wheeler would cut the key rate by half a percentage point at today’s meeting.

Wheeler today dropped his reference to the New Zealand dollar being unjustifiably and unsustainably high – criteria which warrant intervention – while saying its significant decline since April and lower interest rates have led to easier monetary conditions. The Reserve Bank reiterated the currency was at “unjustifiable and unsustainable levels” in its state of corporate intent, released last month, having removed the reference in the June 11 monetary policy statement.

“While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices,” Wheeler said.

The New Zealand dollar rose falling his statement today. It jumped as high as 66.47 US cents, from 65.65 cents immediately before the 9am statement, and was recently trading at 66.15 cents.

Government data last week showed New Zealand’s consumers price index rose at an annual pace of 0.3 percent, and Wheeler said the headline rate was tracking below the bank’s 1 percent to 3 percent target band “due largely to previous strength in the New Zealand dollar and a large decline in world oil prices.” Non-tradable inflation, which covers the domestic sector, increased at an annual 2 percent pace in the period, its lowest level since December 2001.

The bank expects annual CPI to rise to its target mid-point of the range early next year, though “a key uncertainty is how quickly the exchange rate pass-through will occur,” Wheeler said.

New Zealand’s economy is growing at an annual rate of about 2.5 percent, supported by low interest rates, building activity and high net migration, though Wheeler said the outlook has deteriorated since last month’s monetary policy statement forecasts, when it stripped out half a percentage point from expected expansion.

“Rebuild activity in Canterbury appears to have peaked, and the world price for New Zealand’s dairy exports has fallen sharply,” he said.

Prime Minister John Key this week tried to talk up the economy, saying the nation was growing at a “respectable rate” and that New Zealanders shouldn’t talk themselves into “a gloomy mind-set” over the prospect of a weaker Chinese economy and Greece’s latest bailout, which were weighing on global markets.

The Reserve Bank has been juggling the competing tensions of a strong dollar eroding export receipts against rapid house price gains in Auckland, and settled on imposing new lending restrictions on property investment loans as a means to try and cool the housing market from October.

Wheeler said Auckland house prices are still rising at a rapid pace, though outside the nation’s biggest city house price inflation was “relatively low.” Increased building activity is underway in Auckland, though “it will take some time for the imbalances in the housing market to be corrected,” he said.


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