New Zealanders can expect more rate cuts in coming months as the country’s central bank worries about slowing growth, slowing inflation and the dramatic impact of the dairy price plunge will have on demand in the next year or so.
That’s despite continuing fears about the housing bubble in Auckland (a reminder of the situation in Australia).
The RBNZ has already cut its official cut rate in June and July and this morning in a speech in New Zealand, Governor, Graeme Wheeler said that some further monetary policy easing is likely to be required to maintain New Zealand’s economic growth around its potential, and return CPI inflation to its medium-term target level.
He said a further fall in the value of the NZ dollar would also be needed, given the weakness in exports, especially dairy (a similar situation to Australia with weak iron ore prices) “and the projected deterioration in the country’s net external liabilities over the next two years”
NZ’s terms of trade have plunged from 40 year highs 15 months ago, but had plunged as the prices of dairy products collapsed. "Export prices for whole milk powder have fallen 63 percent since February 2014, and oil prices are currently more than 50 percent below their June 2014 level. Net immigration and labour force participation are at historic highs, and the real exchange rate has declined steadily since April 2015,” Mr Wheeler said.
"Over the past two years, annual CPI inflation has been in the lower half of the 1 to 3 percent target band, except for the period since the December quarter 2014 when the fall in oil prices brought CPI inflation to very low levels. The Bank expects annual CPI inflation to be close to the midpoint of the 1 to 3 percent target range by the first half of 2016.”
Mr Wheeler said that, despite recent declines, the exchange rate remains above the level consistent with current economic conditions. “At current levels of export prices, a more substantial exchange rate depreciation will be required to stabilise the net external liabilities position relative to GDP.”
And Mr Wheeler added that there is potential for further downward pressure on global dairy prices. “Also, over coming months, the Federal Reserve and the Bank of England are likely to begin the process of normalising their interest rates, which could assist our currency lower.”
Turning to interest rates, Mr Wheeler said that current monetary policy settings are providing stimulus to the economy at a time when output looks to be growing around 2.5 percent, slightly below potential, and core inflation remains a bit below the mid-point.
Mr Wheeler said the central bank is conscious of the impact that low interest rates can have on housing demand and its potential to feed into higher house price inflation.
He pointed out that lower interest rates risked exacerbating the already extensive housing pressures in Auckland by stimulating housing demand, although, outside of Auckland, nationwide house price inflation is currently running at an annual rate of around 2 percent. But he indicated raising interest rates would be inappropriate as it would put upward pressure on the exchange rate and further dampen CPI inflation.
“The Bank continues to be concerned about the financial stability risks and risks to the broader economy that would be associated with a major correction in Auckland house prices. In the current circumstances, macro prudential policy can be helpful in reducing some of the pressures arising from the Auckland housing market. The proposed LVR measures and the Government’s policy initiatives that it announced in the 2015 Budget should begin to ease the impact of investor activity.
“While a strong supply response over several years is needed to address Auckland’s housing imbalance, macro-prudential policy can help to lower the financial and economic risks while important regulatory and infrastructure issues are addressed and additional investment in new housing takes place.”
