RBNZ adopts easing bias

The Reserve Bank of New Zealand has formally adopted an easing bias and has removed its previous talk of possible future hikes in its Official Cash Rate, which was held unchanged at 3.5 per cent.

The New Zealand dollar fell sharply on the news and economists shifted their expectations towards cuts in interest rates later in 2015 as inflationary pressures remain weak despite annual economic growth running at over 3 per cent.

Releasing its monetary policy decision for April, the bank confirmed the indications of an easing bias given in a speech by Assistant Governor John McDermott last week.
 
"The timing of future adjustments in the OCR will depend on how inflationary pressures evolve in both the non-traded and traded sectors," Reserve Bank Governor Graeme Wheeler said a seven paragraph statement 'in between' full quarterly Monetary Policy Statements.

"It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target," Wheeler said.

In the bank's March quarter MPS, Wheeler took a more neutral stance, saying the bank expected a period of interest rate stability and that "future interest rate adjustments, either up or down, will depend on the emerging flow of economic data."

The bank removed any mention of the potential for higher interest rates and did not repeat the comment about a period of stability. Wheeler's comments were in line with those made in a speech last week by McDermott, which was viewed as introducing an easing bias.

The New Zealand dollar fell almost a cent to US$0.761 after the Reserve Bank's statement, although a cut in the dairy payout forecast for the current 2014/15 season by Fonterra was also a factor. Wholesale interest rates fell around 4 basis points and financial markets now expect 30 basis points of OCR cuts within the next year.

ASB shifted its OCR expectation from a 25 per cent chance of a cut in 2015 to a 50 per cent chance.

Wheeler said lower fuel prices, the high New Zealand dollar and low global inflation had lowered annual inflation to 0.1 per cent in the March quarter.

"Underlying inflation remains low and is expected to pick up gradually," he said.

"Monetary policy will focus on the medium-term trend in inflation. The Bank expects to keep monetary policy stimulatory, and is not currently considering any increase in interest rates."

Wheeler pointed to uncertain outlooks for the European, Chinese and Australian economies and sharp falls in oil prices.

However, New Zealand's economy continued to grow at an annual rate of around three per cent because interest rates were low, net migration was high and construction activity was strong, he said.

Wheeler noted that house price inflation in Auckland was elevated, but made no connection with the outlook for interest rates.

In March he said the bank would not change its interest rate outlook because of the Auckland house price surge, saying the bank would instead use its Macro-Prudential tools to control risks to financial stability.

In this latest statement, Wheeler was more downbeat about the outlook for demand in his comments about the economy than he was in March.

"However, lower dairy incomes, lingering effects of the drought, fiscal consolidation, and the high exchange rate are weighing on the outlook for growth," Wheeler said.

Elsewhere, he repeated the bank's concerns about an unjustifiably and unsustainably high currency. "The appreciation in the exchange rate, while our key export prices have been falling, is unwelcome," he said.