The Reserve Bank of New Zealand (RBNZ), the first central bank in advanced economies to raise its rate last year, added that it expects to keep its rate on hold for some time.
In its previous statement from December, the RBNZ had maintained an tightening policy bias, saying further increases in the policy rate were expected to be required at a later stage. Economists had expected the RBNZ to maintain rates and adopt a more dovish outlook for rates.
The reasons for the RBNZ's more pessimistic view is based on a weaker than expected growth in its trading partners, fiscal consolidation, lower dairy prices, the risk of drought and the dampening impact of the high exchange rate of the New Zealand dollar, known as the kiwi.
The effect is that inflation is likely to be below the central bank's target band through this year, and could even turn negative "for a period" before its moves back toward 2 percent, but in a slower fashion that previously expected.
On the other hand, RBNZ Governor Graeme Wheeler acknowledged that lower oil prices, and thus fuel prices, "will increase households' purchasing power and lower the cost of doing business," while the housing market was showing signs of picking up, particularly in Auckland.
As in recent months, Wheeler said the exchange rate of the kiwi "remains unjustified" and unsustainable despite recent easing and he expects to "see a further significant depreciation."
New Zealand's consumer price inflation rate eased to 0.8 percent in the fourth quarter from 1.0 percent in the third quarter, below the RBNZ's target of 2.0 percent, plus/minus 1.0 percentage point.
The country's Gross Domestic Product expanded by 1.0 percent in the third quarter of last year from the second quarter for annual growth of 3.2 percent, unchanged from the second quarter.
The kiwi appreciated slowly but surely from March 2009 to July 2014 but has been depreciating since then, especially since Jan. 19. It fell sharply in response to the RBNZ's shift in guidance, quoted at 1.357 to the U.S. dollar, down 5.5 percent this year.
The Reserve Bank of New Zealand (RBNZ) issued the following statement by its governor, Graeme Wheeler:
"The Reserve Bank today left the Official Cash Rate unchanged at 3.5 percent.
Trading partner growth in 2015 is expected to be similar to 2014, though the outlook is weaker than anticipated last year. Divergences continue among regions, with growth in China, Japan and the euro area easing in recent quarters, while growth in the US has remained robust.
World oil prices have fallen 60 percent since June last year, which will boost spending power in oil importing economies but reduce incomes for oil exporters. The oil price decline, together with uncertainties around the transition of US monetary policy, has led to an increase in financial market volatility.
The lower oil price will have a significant impact on prices and activity in New Zealand. The most direct and immediate effects are through fuel prices, with the price of regular petrol falling from a national average of $2.23 in mid-2014 to $1.73 currently. This will increase households’ purchasing power and lower the cost of doing business.
Annual economic growth in New Zealand is above 3 percent, supported by rising construction activity and household incomes. The housing market is showing signs of picking up, particularly in Auckland. However, fiscal consolidation, the reduced dairy payout, the risk of drought, and the high exchange rate will weigh on growth.
While the New Zealand dollar has eased recently, we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand’s long-term economic fundamentals. We expect to see a further significant depreciation.
The high exchange rate, low global inflation, and falling oil prices are causing traded goods inflation to be very weak. Non-tradables inflation remains moderate, despite buoyant domestic demand and an improving labour market. Headline annual inflation is expected to be below the target band through 2015, and could become negative for a period before moving back towards 2 percent, albeit more gradually than previously anticipated.
In the current circumstances, we expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data."
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