Kiwi drops after Wheeler opens door for more interest rate cuts

The New Zealand dollar fell to 64.32US c from 64.71USc immediately before the Reserve Bank’s announcement the OCR would be kept at 2.5%.

Reserve Bank governor Graeme Wheeler has opened the door for further interest rate cuts as a worldwide oil glut depresses petrol prices and is set to keep inflation outside the bank's target band for longer than expected. The kiwi dollar fell.

Mr Wheeler says monetary policy will need to stay loose as inflation takes longer to pick up. Government figures last week showed the consumer prices index was dragged down by cheap fuel, rising just 0.1% last year.

Since then oil prices have dropped to 13-year lows, and Mr Wheeler says he will continue to monitor the flow of economic data.

"Headline inflation is expected to increase over 2016, but take longer to reach the target range than previously expected," he says.

"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."

Last month, the Reserve Bank forecast annual inflation rising back within the 1-3 % target band in the March quarter of this year, due in part to last year's drop in oil prices washing through the data. It projected the CPI will creep up to the 2% midpoint by December 2017.

At the time, Mr Wheeler said he was done cutting interest rates with the record-low level enough to spur inflation back within the target band, while keeping the caveat that he would act if circumstances warranted.

Last week's CPI figure undershot the bank's forecast, although Mr Wheeler says annual core inflation, which strips out temporary price movements, was within the target range, and that inflation expectations were stable.

He says there were still a number of risks threatening the outlook, including the prospects for global growth and China in particular, international financial market conditions, dairy prices, the country's strong net inbound migration, and pressures in the housing market.

While house price inflation was showing signs of abating since the Reserve Bank imposed lending curbs on investor-buyers and the government rolled out plans to tax property more stringently, Mr Wheeler says it was too early to tell whether the rate of increase was moderating.

The recent volatility in financial markets has pushed down the kiwi dollar and market interest rates, but "a further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices," he says.

Prices for whole milk powder, the country's biggest commodity export, have remained soggy in the GlobalDairyTrade auctions, spurring processors Fonterra, Westland and Open Country Dairy to cut their forecast payout to farmers for the season.

The weakness in dairy prices prompted Fitch Ratings to lower its outlook on New Zealand's sovereign credit rating to stable from positive when affirming the nation's AA rating.

The rating agency downgraded its forecast of New Zealand gross domestic product growth due to the downbeat agricultural outlook, putting it at odds with Bank of New Zealand economists who upgraded their forecast on the strength of recent services and manufacturing gauges.

Mr Wheeler says New Zealand's economy is expected to pick up this year due to persistently strong inbound migration, high levels of tourism, an elevated level of construction work, and improving business and consumer confidence.

(BusinessDesk)