By Bernard Hickey
The Reserve Bank of New Zealand has cut the Official Cash Rate by 25 basis points to 1.75% as universally expected and has forecast no more cuts because it says monetary policy is now relaxed enough for inflation to rise back into the middle of the bank's 1-3% target band.
Governor Graeme Wheeler said significant surplus capacity existed across the global economy despite improved economic indicators in some countries and that global inflation remained weak even though commodity prices had come off their lows.
"Political uncertainty remains heightened and market volatility is elevated. Weak global conditions and low interest rates relative to New Zealand are keeping upward pressure on the New Zealand dollar exchange rate," Wheeler said.
"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," he said.
The New Zealand dollar jumped almost a cent to 73.4 USc after the statement.
Domestic GDP growth was being supported by strong population growth, construction activity, tourism, and accommodative monetary policy, he said.
"Recent dairy auctions have been positive, but uncertainty remains around future outcomes. High net immigration is supporting growth in labour supply and limiting wage pressure."
Wheeler said house price inflation remained excessive and was posing concerns for financial stability.
"Although house price inflation has moderated in Auckland, it is uncertain whether this will be sustained given the continuing imbalance between supply and demand," he said.
Wheeler said headline CPI inflation continued to be held below the target range by ongoing negative tradables inflation.
"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," he said, adding that monetary polcy would continue to be accommodative.
"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," he said.
"Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."
The bank forecast in its Monetary Policy Statement the OCR would not fall further than 1.7% in its forecast horizon out to the December quarter of 2019.
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