Reserve Bank Governor Graeme Wheeler will signal a prolonged interest-rate pause when he delivers his latest monetary policy statement tomorrow, economists say. With inflation at the bottom of his target band, and lower than when he started raising rates, the governor’s fledgling tightening cycle may already have come to an end.
“There is a chance they won’t need to hike again,” said Nick Tuffley, chief economist at ASB Bank in Auckland, who expects rates to be kept on hold for a year. “Further rate increases are a matter of if as much as when.”
When he started raising borrowing costs in March from a record low of 2.5 percent, Wheeler envisaged at least 200 basis points of tightening over two years. He paused in September with 100 points completed as a strong New Zealand dollar, falling oil prices and a weak global economy pushed annual inflation to just 1 percent in the third quarter, half the 2 percent midpoint of his 1-percent-to-3-percent target range.
4 Percent Peak
Wheeler will hold the official cash rate at 3.5 percent when he announces his latest decision at 9 a.m. in Wellington tomorrow, all 14 economists in a Bloomberg News survey predict. He won’t resume raising the benchmark until at least the third quarter of 2015, according to the median forecast. Tuffley now predicts the rate will peak at 4 percent in early 2016 instead of 4.5 percent.
Slumping dairy prices due to a global oversupply are the latest indicator of slower economic growth as they lower farm incomes and damp consumer spending. Favorable weather has boosted milk output in New Zealand and Australia, while sanctions on Russia have pushed dairy product into other markets, weighing on prices.
Fonterra Cooperative Group (FSF), the world’s biggest dairy exporter, today cut its forecast payout to New Zealand farmers for the 2014-15 season for a third time after whole milk powder prices tumbled 56 percent in the past 12 months. Fonterra lowered its forecast by 60 cents to NZ$4.70 per kilogram of milksolids. It paid a record NZ$8.40 last season.
NZ$6 Billion Hit
“Sharp falls in dairy commodity prices will be delivering a close to NZ$6 billion ($4.6 billion) hit to dairy incomes this season, which will flow through into lower domestic spending,” said Cameron Bagrie, chief New Zealand economist at ANZ Bank in Wellington. “If dairy prices don’t start to lift in six months, that’s a scenario that could see the RBNZ having to lower the OCR.”
Traders have reduced their expectations for a rate rise as evidence mounts of benign inflation.Interest-rate swaps are pricing just 8 basis points of rate increases over the next 12 months, down from 40 points in early October, according to a gauge compiled by Credit Suisse Group AG.
Growth is slowing in China and Australia, New Zealand’s two biggest trading partners, Japan’s recession is deepening and Europe is flirting with deflation. Inflation generally remains below central bank policy targets in advanced economies, indicating substantial output gaps, the International Monetary Fund said in its latest World Economic Outlook in October.
Yet there are still good reasons for Wheeler to remain wary of inflation, said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington.
Record Immigration
New Zealand’s economy expanded 3.9 percent in the second quarter from a year earlier — the fastest annual pace in 10 years — fanned by construction, business investment and private consumption.
Demand is being underpinned by record immigration and renewed strength in the housing market in Auckland, home to a third of the nation’s 4.5 million people.
Wheeler last month said he would leave limits on low-deposit home lending in place because of the risk of a resurgence in house prices, which climbed 9.3 percent in Auckland in the year though November. Complicating Wheeler’s balancing act is a drop in long-term mortgage rates.
“Inflation is likely to pick up and they can’t ignore that, so they’ll probably keep promulgating a tightening bias,” said Ebert, who nevertheless expects Wheeler to hold rates until December next year.
Communication Objective
Sean Keane, an analyst in Auckland at Triple T Consulting, said it would be self-defeating for the RBNZ to signal further rate increases when the Reserve Bank of Australia is under pressure to cut borrowing costs, as it would push the kiwi dollar higher against its Australian counterpart.
Wheeler has already intervened in currency markets to weaken the kiwi, whose strength is suppressing import prices and damping export returns.
“The main communication objective for the RBNZ should be to drive the currency lower,” said Keane. The best way to do that “would be to offer a more neutral policy view to the market” and “indicate that the risk to an uptick in inflation in 2015 is lower than it initially assumed,” he said.
With oil prices slumping about 20 percent in the past month to a five-year low, Bagrie said there’s a strong risk inflation will dip below Wheeler’s target band by the end of the year.
“We struggle to see any justification for anything even slightly hawkish” from Wheeler tomorrow, he said. “Monetary policy is set for an extended siesta.”
Source: Bloomberg