RBNZ signals slow rate cuts

Reserve Bank of New Zealand Governor Graeme Wheeler has dampened speculation the Official Cash Rate could be cut quickly and deeply later this year, arguing the economy was still growing solidly and inflation was forecast to pick up next year.

Some economists had forecast as many as four more 25 basis point cuts in the OCR to 2.0 per cent after a slump in dairy prices and big falls in consumer and business confidence since April.

Wheeler delivered a speech on the inflation outlook and monetary policy to ExportNZ in Tauranga in which he said further monetary easing was necessary, but that the economy was not headed for a recession that would require big cuts.

"Some local commentators have predicted large declines in interest rates over coming months that could only be consistent with the economy moving into recession," Wheeler said.

"We will review our growth forecasts in the September MPS (Monetary Policy Statement) but, at this point, we believe that while demand and output growth may be a little below trend, several factors are supporting economic growth," Wheeler said.

"These include the easing in monetary conditions, continued high levels of migration and labour force participation, ongoing growth in construction and continued strength in the services sector."

The Reserve Bank was required to avoid unnecessary volatility in output, interest rates and the exchange rate, he said.

"Attempting to return inflation to the midpoint quickly could create the risk of overshooting the inflation goal, un-anchoring inflation expectations, and increasing the volatility of interest rates and the exchange rate, as monetary policy is significantly eased and subsequently tightened," Wheeler said.

"On the other hand, while moving interest rates only gradually might have the benefit of inducing less volatility in output and key relative prices, it would increase the risk that the Bank consistently undershoots its inflation target, and that inflation expectations get anchored at too low a level," he said.

"Our judgement in the current circumstances is that aiming to return inflation to around its medium-term target level in about nine to 12 months' time is an appropriate speed of adjustment."

Wheeler also repeated comments about the need for further currency depreciation.

Economists viewed the comments as less 'dovish' than some had expected. The New Zealand dollar rose around half a cent to 67 USc and wholesale interest rates rose several basis points.