New Zealand would require further monetary policy easing and exchange rate depreciation for maintaining its economic growth around its potential and return consumer price inflation to its medium-term target level, the head of Reserve Bank of New Zealand said on Wednesday. That said, the RBNZ Governor Graeme Wheeler said the economy is not as weak as being predicted by many local commentators.
While speaking to an ExportNZ/Tauranga Chamber of Commerce audience, Wheeler said the scope to revise policy settings is a key strength of the monetary policy regime and the bank would review and revise its policy if needed to meet its price stability objective.
Wheeler also said further exchange rate depreciation is needed due to the weakness in export commodity prices and the expected deterioration in net external liabilities over the next two years.
The bank expects annual consumer price inflation to be close to the midpoint of the 1 percent to 3 percent target range by the first half of 2016. The governor cited the future path of the exchange rate, influenced by future commodity prices, and the depreciation speed as risks and uncertainties around the inflation outlook.
Despite recent falls, the exchange rate remains above the level consistent with current economic conditions. At current levels of export prices, a more substantial exchange rate depreciation would be required to stabilize the net external liabilities position relative to GDP, Wheeler said.
“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 normalizing their interest rates, which could assist our currency lower,” said Wheeler.
Notwithstanding current monetary policy settings providing stimulus to the economy, Wheeler noted that output looks to be rising around 2.5 percent, slightly below potential, and core inflation remains a bit below the mid-point.
The governor indicated that large declines in interest rates which many commentators are predicting would materialize only if the economy moves into recession.
The official suggested that growth forecasts will be reviewed in the bank’s September monetary policy statement. Wheeler noted that currently growth is being supported by easy monetary policy, high migration levels and labor force participation, strength in the construction and services sectors.
Westpac Economist Michael Gordon said he remains comfortable calling for a low point in the OCR of 2 percent and pointed out that the view is not based on a forecast of recession but on what will be needed to meet the RBNZ’s inflation target over the medium term. He expects that over the next few months data flow will persuade the RBNZ to cut its interest rate projections further.
J.P. Morgan Australia Economist Tom Kennedy said he continues to expect another rate cut in September but nothing thereafter as today’s speech has little bearing on his outlook. The economists now sees 2.5 percent growth on an average through the end of 2016 and for further easing beyond September to materialize, growth should undershoot his target.
The material has been provided by InstaForex Company – www.instaforex.com