The New Zealand Reserve Bank has again left its key interest rate on hold as the economy continues to burble along in a comforting burst of low inflation growth.
And there’s no sign of any reason to lift rates in the near term as inflation remains well under control, despite continuing solid growth.
Inflation is running at around 1% at the moment and lower oil price and weak global inflation mean that won’t be under upward pressure from the still solid growth economy.
The RBNZ said this morning that the economy is expected to maintain growth momentum into 2016, despite the sharp fall in dairy prices and weak demand form other major economies, other than the US.
For the thousands of Australian companies operating in New Zealand or trading with it, the RBNZ decision and examination of the economy is welcome news as they battle a more sluggish Australian economy.
RBNZ holds cash rate at 3.5%
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Interestingly, other than the mention of house prices, there’s no other commentary on the once booming NZ housing sector which forced the central bank to introduce restrictions on low deposit housing loans (which was later dropped for home building, especially in Christchurch).
It’s a sign the Kiwis have a nicely diversified growth base, with the only drawback being the $NZ5.5 billion hit to national income in the next year from the slide in world dairy prices. The RBNZ expects that to reverse for the 2016 year.
"New Zealand’s economic growth is running at an annual rate of around 3½ percent. While dairy prices have declined sharply, domestic demand has retained momentum, supported by the ongoing growth in consumption and construction activity,” the central bank said.
"Interest rates are low by historical standards and continue to support domestic demand. The exchange rate does not reflect the decline in export prices this year and remains unjustifiably and unsustainably high. We expect to see a further significant depreciation.
“Growth is expected to remain at or above trend through 2016, with unemployment continuing to decline.
“Modest inflation pressures suggest the expansion can be sustained for longer than previously expected with a more gradual increase in interest rates.
“Underpinning this, the economy’s productive capacity is being boosted by high labour force participation, strong net immigration and continued investment growth,” the morning’s statement said.
The RBNZ said the main risks for the economy were the fall in dairy prices, which are expected to recover in 2015, the overvalued exchange rate (the four rate rises this year have helped keep the NZ dollar higher than it should be, a point the RBNZ omits), and the strength of construction activity, especially the rebuilding of Christchurch.
It said there were risks of higher inflation from the impact of rising capacity pressures on domestic inflation, the response of house prices to the strong migration inflows, and the impact of lower oil prices.
But it said "CPI inflation remains modest, at 1 percent in the year to September. Weak global inflation, falls in international oil prices and the high exchange rate are the main influences. Inflation in the non-tradeables sector remains subdued with capacity pressures having less impact than usual.”
"Some further increase in the OCR is expected to be required at a later stage. Further policy adjustments will depend on data emerging over the assessment period,“ the statement ended.
