The Reserve Bank of New Zealand (RBNZ), which cut its rate by 100 basis points in 2015, most recently in December, still expects inflation this year to exceed that of 2015 but expects it to take longer to reach its 1-3 percent target range.
The guidance by the RBNZ is more dovish than in December when the central bank said its policy stance needs to be accommodative to ensure that inflation settles near the middle of its target range and that it "will reduce rates if circumstances warrant."
New Zealand's headline inflation fell to 0.1 percent in the fourth quarter of 2015, the lowest rate seen since a brief stint of deflation in 1999, from 0.4 percent in the two preceding quarters. This was below the central bank's own forecast for fourth quarter inflation of 0.4 percent.
RBNZ Governor Graeme Wheeler said falling fuel prices were the main reason for low inflation but added that core inflation, which excludes temporary price changes, was consistent with the target range at 1.6 percent.
In its December Monetary Policy Statement, the central bank forecast that inflation would start to move into its target range in the first quarter of 2016 as the fall in petrol prices from lower oil prices drops out of the annual comparison and the impact of the depreciation of the New Zealand dollar from April 2015 is passed onto to higher import prices.
In December inflation in the first quarter of this year was seen rising to 1.2 percent and then hitting 1.6 percent by the fourth quarter of this year.
But Wheeler's statement that inflation will take longer to reach the bank's target indicates that bank will cut its forecast for inflation in March when it updates its forecast, paving the way for a rate cut.
Wheeler said uncertainty about the global economy had risen due to weaker growth in emerging markets and China, while the prices of oil and commodities remain weak.
New Zealand's economy softened in the first half of last year but Wheeler still expects growth to rise in 2016 on the back of immigration, tourism, construction activity and improved business and consumer confidence.
New Zealand's Gross Domestic Product expanded by 0.9 percent in the third quarter from the second quarter, above the RBNZ's expectation for 0.6 percent growth. On an annual basis, the economy expanded by 2.3 percent in the third quarter of last year, down from 2.4 and 2.7 percent in the two preceding quarters.
But unemployment also edged higher to 6.0 percent in the third quarter from 5.9 percent in the second and 5.8 percent in the first quarter.
Although financial markets have been volatile this month, Wheeler said financial conditions had recently eased and the New Zealand dollar had declined.
However, Wheeler once again called for "further depreciation in the exchange rate," given the ongoing weakness in export prices, such as dairy products.
The New Zealand dollar, known as the kiwi, started depreciating in July 2014 and fell steadily to February 2015. After a two month rebound, it resumed its decline, falling from April to almost 1.60 to the U.S. dollar by late September 2015.
From September through the end of 2015 the kiwi firmed slightly but still ended up being down 12.3 percent for the entire year.
The kiwi has started the year on a weak footing and was trading at 1.53 to the dollar today, down 4.5 percent since the beginning of 2016. After the RBNZ's statement, it fell further to 1.55.
The Reserve Bank of New Zealand issued the following statement by its governor, Graeme Wheeler:
"The Reserve Bank today left the Official Cash Rate unchanged at 2.5 percent.
Uncertainty about the strength of the global economy has increased due to weaker growth in the developing world and concerns about China and other emerging markets. Prices for a range of commodities, particularly oil, remain weak. Financial market volatility has increased, and global inflation remains low.
The domestic economy softened during the first half of 2015 driven by the lower terms of trade. However, growth is expected to increase in 2016 as a result of continued strong net immigration, tourism, a solid pipeline of construction activity, and the lift in business and consumer confidence.
In recent weeks there has been some easing in financial conditions, as the New Zealand dollar exchange rate and market interest rates have declined. A further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices.
House price inflation in Auckland remains a financial stability risk. There are signs that the rate of increase may be moderating, but it is too early to tell. House price pressures have been building in some other regions.
There are many risks around the outlook. These relate to the prospects for global growth, particularly around China, global financial market conditions, dairy prices, net immigration, and pressures in the housing market.
Headline CPI inflation remains low, mainly due to falling fuel prices. However, annual core inflation, which excludes temporary price movements, is consistent with the target range at 1.6 percent. Inflation expectations remain stable.
Headline inflation is expected to increase over 2016, but take longer to reach the target range than previously expected. Monetary policy will continue to be accommodative. Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data."
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