New Zealand's central bank is now set to cut interest rates due to weak inflation and tough times for dairy farmers, with some economists calling for a reduction as early as June.
The view marks a dramatic shift: as recently as late April the majority of economists predicted the Kiwi central bank would remain on hold at 3.5% for the foreseeable future, making it something of an outlier in a region where interest rates have been coming down.
A poll of 13 economists showed median expectations of rates at 3.25% in September and 3.00% in December. Three economists are expecting a rate cut in June, followed by one in July.
In late April, Reserve Bank Governor Graeme Wheeler said he was keeping a close eye on data and would be willing to cut if demand weakens and if tepid inflation becomes entrenched. The central bank is required to keep inflation within a 1%-to-3% range, while aiming for near 2%.
Annual inflation rose just 0.1% in the three months ended Mar. 31 and the central bank forecasts it won't move toward the middle of the range until September 2016. Recent numbers, including weak first-quarter wage inflation data and softer-than-expected retail card spending, has added to view rate cuts might be coming.
"We've seen enough ...to call the official cash rate lower," said ANZ Chief Economist Cameron Bagrie. ANZ Bank now expects the central bank to cut by 0.25 percentage point in June and follow up with another cut in July. "Demand across the economy is still solid yet the reality is that inflation has failed to show up at the growth party," he said.
ASB Bank is calling for two quarter percentage point cuts before the end of the year due to low inflation, muted wage pressures, an ongoing strong New Zealand dollar, as well as a negative outlook for the dairy industry.
New Zealand's agriculture-rich economy has been supported in recent years by surging demand from Asia's rising middle classes for its dairy exports. But global dairy prices have been under significant pressure lately, falling around 50% over the past year. The weaker dairy prices also have impacted dairy giant Fonterra's forecast payout for its 10,600 farmer shareholders. Farmers now stand to earn around 6 billion New Zealand dollars ($4.4 billion) less in the year ending May 31 than in the prior season.
Yet the call for cuts is not unanimous, with four of the institutions polled maintaining rates will remain on hold over the next 12 months, and two see them higher.
"While the risk of official cash rate cuts have increased, we remain skeptical that the RBNZ will pull the trigger due to continued strength in the domestic economy," said Westpac Bank Chief Economist Dominick Stephens. That, coupled with the booming housing market, should stay the central bank's hand, he said.
New Zealand's economy is growing around 3.0%, supported by a booming housing market in the country's largest city, Auckland, and reconstruction following a series of devastating earthquakes in the second biggest, Christchurch.
"Consequently, we expect that the OCR (official cash rate) will remain on hold through the coming year. But we must admit, the risk of cuts has increased, said Mr. Stephens.
(END) Dow Jones Newswires
May 12, 2015 00:44 ET (04:44 GMT)
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