RBNZ cuts for last time
The Reserve Bank of New Zealand cut the Official Cash Rate for a fourth time, taking it to 2.5 per cent as most economists expected, but forecast the rate would stay there until the end of 2018 - despite also lowering its inflation forecast.The Reserve Bank increased its forecasts for GDP growth, but saw inflation not returning to the centre of its one to three per cent target band until December 2017. In its September Monetary Policy Statement it had forecast a return to 2.1 per cent by September 2016. The bank took the unusual step of citing clause 4B of its Policy Targets Agreement, which specifies it should take into account financial system soundness when setting monetary policy."With inflation expected to increase steadily, consistent with the inflation target, a much sharper adjustment in interest rates than projected risks being inconsistent with clause 4b of the PTA, and could not change near-term inflation outcomes," the bank said in its full Monetary Policy Statement.The statement was seen as hawkish by economists and painted the Reserve Bank Governor as a reluctant cutter, which pushed the New Zealand dollar up almost a cent to 67.4 US cents. Financial markets had positioned for a cut and 13 of 15 economists polled had expected a cut. Still, the decision to leave the rate track forecast unchanged and to accept a later return to the centre of the one to three per cent target band surprised some economists, who are concerned the Reserve Bank is over-estimating likely inflation and therefore holding interest rates too high.Governor Graeme Wheeler said global economic growth was below average and inflation was low, despite stimulatory monetary conditions. New Zealand's growth rate had softened through 2015, but recovery in export prices, a recent lift in confidence, and increasing domestic demand from the rising population were expected to see growth strengthen over the coming year, he said.Wheeler warned that the New Zealand dollar's rise since August was "unhelpful and further depreciation would be appropriate in order to support sustainable growth."He noted house price inflation in Auckland remained high, "posing a financial stability risk. ""Residential building is accelerating, and recent tax and LVR measures are expected to reduce housing pressures. There are some early signs that Auckland house price inflation may be moderating," he said.Wheeler said CPI inflation was below the one to three per cent target range, mainly due to the earlier strength in the New Zealand dollar and a 65 per cent fall in world oil prices since mid-2014. "The inflation rate is expected to move inside the target range from early 2016, as earlier petrol price declines will drop out of the annual calculation, and the lower New Zealand dollar will be reflected in higher tradables prices," he said. The Reserve Bank cited a number of uncertainties and risks to this outlook, including the risk of low dairy prices for longer and an El Nino drought."Risks to the domestic outlook include the prospect of net immigration staying high for longer and