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15 Nov 2016

RBNZ Governor Optimistic about Growth

The RBNZ is optimistic about growth, with Reserve Bank Governor Graham Wheeler saying extra fiscal stimulus is not needed to create inflation. While the official cash rate was cut by 25 basis points last week to a new low of 1.75 percent, further moves are not expected any time soon and Government intervention is not needed to bring inflation back within its target range of 1-3 percent.

Despite a high New Zealand dollar and persistent low inflation, Governor Wheeler remains positive about the New Zealand economy on the back of the latest interest rate cut: "The economy's growing probably at around 3.5%, maybe a little bit faster. We think potential output growth's probably about 2.9% so you are creating a positive output gap," Wheeler said, adding "So would you say to yourself: do you need fiscal stimulus at this point? And the answer is probably not, no you don't."

Important decisions still need to be made regarding infrastructure spending and housing, however, with the Auckland market still facing significant challenges: "If I look at the housing market there are issues around increasing housing supply up in Auckland, and to the extent that there are regulatory issues or there are land availability issues or infrastructure constraints and bottlenecks, and if that's something that could be handled through expenditure allocation or engagement with the councils to get improved outcomes then that's all to the good," he said, adding "But I don't see any need at this stage, given where the economy is, for further fiscal stimulus."

There are still lots of hurdles to overcome, however, with a higher than expected New Zealand dollar and growing international uncertainty continuing to affect inflation and domestic growth. While Deputy Governor Grant Spencer said the currency is not "around peak situations at present," the Kiwi is at a much higher level than the Reserve Bank would like. The RBNZ has never ruled out currency intervention, having already sold New Zealand dollars once during Wheeler's term after four 'traffic light' conditions were met.

The election of President Trump continues to create novel market conditions, with uncertainty also surrounding future outcomes in the local dairy industry. "Political uncertainty remains heightened and market volatility is elevated." said Wheeler, adding "Weak global conditions and low interest rates relative to New Zealand are keeping upward pressure on the New Zealand dollar exchange rate ... The exchange rate remains higher than is sustainable for balanced economic growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed."

Despite weak inflation figures, Wheeler expects targets to be met without additional stimulus: "Annual CPI inflation was weak in the September quarter, in part due to lower fuel prices and cuts in ACC levies. Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, and reduced drag from tradables inflation ... Our current projections and assumptions indicate that policy settings, including today’s easing, will see growth strong enough to have inflation settle near the middle of the target range," said Wheeler, adding "Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."

Image Source: wk1003mike /