Tomorrow morning, the Reserve Bank of NZ will abandoned its hairy-chested monetary policy stance and make it clear that if need be it will cut rates to help protect the economy against weak inflation.
The Kiwis central bank releases its latest decision on its official cash rate just after 7 am, and after a speech last week (little noticed in Australia) by one of the bank’s most senior assistant governors, it is clear the central bank has changed its stance – significantly.
Unlike its Australian counterpart, which cut rates in February because it felt the economy needed a hit to get growth back on track to give employment a better chance of growing more strongly, the RBNZ lifted rates four times in 2014 because it was worried about rising inflation and a strongly performing economy.
Both central banks have a patchy property boom to contend with – in Sydney and perhaps Melbourne for the RBA, Auckland for the RBNZ. The Kiwi central bank attempted to control its boom via macroprudential controls introduced in late 2013, aimed at trying to limit the rapid growth in risky loans with high loan to valuation ratios.
That has worked, but the boom switched to new home building and established home purchases in Auckland which is seeing price growth similar to that in Sydney.
But the slide in oil prices and the high value of the NZ dollar has seen inflation fall to near record lows, which has the RBNZ worried,
Assistant Governor Dr John McDermott said in his speech last week that “The Reserve Bank… will ensure that monetary policy is stimulatory to support output growth above potential, to help lift inflation back to target.”
Dr McDermott said that the impact of some factors influencing headline inflation will prove temporary. Past declines in oil prices will reduce headline inflation substantially in 2015, but if there are no further falls, then this negative contribution will drop out of the annual inflation rate by the start of next year, he said.
“Our approach, as a flexible inflation targeter, is to support ongoing sustainable growth in New Zealand,” Dr McDermott said, adding that stimulating output growth above potential will help lift non-tradables inflation, returning headline inflation gradually to the target midpoint.
“Growth is currently underpinned by high net immigration, strong employment and construction activity, and robust household spending.
“At present, the Bank is not considering any increase in interest rates. Before considering any tightening in monetary policy we would need to be confident that increased capacity utilisation and labour market tightness was generating, or about to generate, a substantial increase in inflation.
“Evidence of weakening demand and domestic inflationary pressures would prompt us to consider lowering interest rates. There are some areas of uncertainty surrounding the outlook for capacity pressures, including the lingering effects of the recent drought in parts of the country, fiscal consolidation, lower dairy incomes and the impact of the exchange rate on export and import substitution industries.
“Beyond these factors, we are also assessing the outlook for tradables inflation that is being dampened by global conditions and the high exchange rate. The fact that the exchange rate has appreciated while our key export prices, such as dairy, have been falling, is unwelcome.”
Dr McDermott said that the Bank remains vigilant in watching wage bargaining and price-setting outcomes. Should these settle at levels lower than our target range for inflation, it would be appropriate to ease policy.
“This cycle is unusual in that CPI inflation is staying very low, requiring interest rates to also remain low. The timing of future adjustments in interest rates will depend on the evolution of inflationary pressures in both the traded and non-traded sectors. We continue to monitor and carefully assess the emerging flow of economic data,” Dr McDermott said in his speech.
