New Zealand’s central bank has joined the US Federal Reserve in holding interest rates steady while acknowledging that threats to the country’s economy had risen in recent weeks – specifically to the outlook for growth and inflation.
But unlike the Fed the Reserve Bank of NZ indicated it may have to cut interest rates in coming months if inflation does not move from its recent dip into deflationary territory.
The bank held its key rate at 2.5% this morning as it acknowledged that the uncertainty had risen in recent weeks over the outlook for growth in China – the country’s major trading partner. The increased volatility in financial markets that has marked the start of 2016 has also become a major concern for the central bank.
”There are many risks around the outlook. These relate to the prospects for global growth, particularly around China, global financial market conditions, dairy prices, net immigration, and pressures in the housing market,” Governor, Graeme Wheeler said in a statement this morning.
"Uncertainty about the strength of the global economy has increased due to weaker growth in the developing world and concerns about China and other emerging markets. Prices for a range of commodities, particularly oil, remain weak. Financial market volatility has increased, and global inflation remains low.
"In recent weeks there has been some easing in financial conditions, as the New Zealand dollar exchange rate and market interest rates have declined. A further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices,” he said.
With last week’s release of the consumer price index for the December quarter surprised with a dip into deflation with a reading of minus 0.5%, RBNZ Governor, Graeme Wheeler restated his view that further cuts in interest rates may be required to bring inflation closer to its target.
"Headline CPI inflation remains low, mainly due to falling fuel prices. However, annual core inflation, which excludes temporary price movements, is consistent with the target range at 1.6 percent. Inflation expectations remain stable,” he said.
"Headline inflation is expected to increase over 2016, but take longer to reach the target range than previously expected. Monetary policy will continue to be accommodative.
"Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data," Mr Wheeler said.
