WELLINGTON: New Zealand's central bank is expected to stand pat on monetary policy and signal an extended pause well into next year on Thursday, as slower growth at home and abroad and tame inflation pressures rule out the need for further near-term rate rises.
The Reserve Bank of New Zealand (RBNZ) took to the sidelines in its September monetary statement, stating it wanted to assess the impact of its 100 basis points of rises between March and July as it looked at falling commodity prices, moderate inflation, an elevated exchange rate, and surging immigration.
Consumer price inflation slowed to 1 percent in the year to Sept 30, the bottom of the RBNZ's 1-3 percent target band, and that is set to force the central bank into adopting a more dovish tone.
"For now, low near term inflation is the key. The RBNZ is on hold," said Bank of New Zealand economist Doug Steel.
"But while we think the RBNZ will remain on hold, we do not think it will go as far as dropping the idea that rates will eventually need to be raised again at some - distant - point in the future."
A Reuters poll of economists expects the bank's next move will be a tightening in the third quarter or later next year, and the cash rate at 4 percent by the end of 2015. Financial market pricing sees just 12 basis points of rises over the next 12 months, about a third of the level priced in before the September statement.
TOO FAR TOO FAST?
With the global economy on a shaky footing as growth cools in China - New Zealand's major export market - and the euro zone facing the threat of recession, the RBNZ has reason to be cautious. Moreover, as domestic inflation remains under control and with little prospect it will build up a head of steam any time soon, the suggestion has been raised the RBNZ has overdone the tightening.
"The OCR won't be lowered any time soon - unless the global picture deteriorates markedly, long an important qualification," ANZ analysts said in a note.
In fact, bank fixed home lending rates have eased around a quarter of a percentage point this month, which is in effect an easing of monetary policy.
But with the rest of the developed world yet to start rate rises and looking to be on hold well into 2015 also, the RBNZ will be engaging in a policy balancing act.
New Zealand's economy is seen slowing to an annual rate of 3 percent early next year from the decade high 3.9 percent posted in the year to June 30, as the impact of sharply lower dairy prices, down close to 50 percent this year, is felt.
But New Zealand consumers remain modestly positive, the housing market is firm although the rate of price rises has slowed, and there is stimulus from record immigration gains, and the continued earthquake rebuilding in the Canterbury region.
It will also have to take into account the fall in the New Zealand dollar, which has been an important factor in dampening imported inflation pressures.
The trade weighted NZ dollar has declined more than 2 percent since the RBNZ's September statement, and about 6.5 percent since its mid-July record high, although another bout of "jaw boning" to keep pressure on the currency is expected.
"But it (the RBNZ) will contend that the depreciation has not been sufficient, and that the exchange rate remains 'unjustified and unsustainable'," Westpac chief economist Dominick Stephens said.
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