- Paul Dales, chief Australia and New Zealand economist at Capital Economics
The Reserve Bank of New Zealand kept the official cash rate on hold at 3.5%, but signalled that it may cut it in case demand and prices weaken. Annual inflation slid to the lowest level in 15 years in the first quarter after oil prices slumped, leading analysts to increase bets that RBNZ Governor Graeme Wheeler may cut interest rates this year. Traders see about a 70% possibility Wheeler will lower rates by the end of the year. Yet, the Reserve Bank of New Zealand last month said rates could move either up or down even as it forecast inflation will not return to its 2% target until 2017. The New Zealand economy continues to expand at an annual rate of around 3%, supported by low interest rates, high net immigration, robust construction activity, as well as decline in fuel prices. However, lower fuel prices, coming on top of the high exchange rate and low global inflation, lowered annual inflation to 0.1% in the Q1. Underlying inflation remains subdued and is estimated to rise gradually. Thus, monetary policy will focus on the medium-term inflation trend. The bank expects to keep monetary policy stimulatory, and is not currently considering any hike in rates.
Wheeler also highlighted considerable uncertainties exist in Europe, China and Australia, and on the timing of US policy adjustment. However, the RBNZ continues to expect that the global economic growth should be supported by the fall in oil prices.
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