As widely expected, the Reserve Bank of New Zealand (RBNZ) has left the official cash rate on hold at 2.50%, which follows December’s 0.25% cut. However, the RBNZ did shift its stance to a more dovish tone, noting that “further policy easing may be required over the coming year”.
Below are the key sections from RBNZ governor, Graeme Wheeler’s, statement:
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.
The domestic economy softened during the first half of 2015 driven by the lower terms of trade. However, growth is expected to increase in 2016 as a result of continued strong net immigration, tourism, a solid pipeline of construction activity, and the lift in business and consumer confidence.
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.
House price inflation in Auckland remains a financial stability risk. There are signs that the rate of increase may be moderating, but it is too early to tell. House price pressures have been building in some other regions.
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.
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.
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.
As you can see, Wheeler is concerned about emerging risks, particularly those surrounding China, the Auckland housing market, financial market conditions, dairy prices (New Zealand’s key export commodity), and immigration rates. He would also like to see the New Zealand dollar head lower, which would be assisted by further cutting the cash rate.
I’ll eat my hat if New Zealand’s cash rate is not cut again this year. Markets seem to agree, with both the New Zealand dollar and swap rates falling after the announcement.
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