Wellington • New Zealand’s central bank said the chances of an interest-rate cut have increased and it will be watching growth data closely to see whether an expected pick-up materialises.
“We’ve been pushed nearer to that trigger point” of cutting rates, The Reserve Bank of New Zealand (RBNZ) assistant governor John McDermott (picture) said in an interview yesterday in Wellington. “We’re putting a stake in the sand here and saying we expect growth to accelerate” in the third quarter (3Q). If it doesn’t, “that means we’ve got something wrong and we’re going to have to reconsider where we’re at,” he said.
The RBNZ earlier held its official cash rate at a record-low 1.75% and surprised economists and investors by pushing out its forecast for a hike to late 2020, a year later than it projected just three months ago. It cited weaker growth and the risk that a slump in business confidence could hamper investment.
“Animal spirits in an economy matter,” McDermott said. “It is possible to talk yourself into a recession. You can generate self-fulfilling expectations, we recognise that. The more that happens, the more we’ll try and lean against that. The economic fundamentals say it should be okay, but there’s a psychological problem that sits there.”
The New Zealand dollar fell three quarters of a US cent on the RBNZ’s looser stance and swap rates dropped. Both extended their declines on McDermott’s comments, the kiwi falling a further quarter cent to 66.52 cents, the lowest in 21⁄2 years, and the two-year swap rate dropping to 2%, its lowest since September 2016.
McDermott said the RBNZ was happy with the kiwi dollar’s depreciation in recent months, but was concerned that the yield curve was building in expectations for a monetary tightening. It wanted markets to understand that a rate increase was “off the table for the foreseeable future”.
“We need that yield curve down here,” he said. “You guys are starting to anticipate something that we don’t think is warranted.”
In current circumstances, the bank would need to see core inflation above 2% before it considered raising rates, he said. The RBNZ’s sectoral factor model of core inflation is currently at 1.7%.
McDermott, who is the RBNZ’s chief economist, said the bank would be happy to look through headline inflation above 2%, the midpoint of its 1%-3% target range. “That’s not going to spook us. We need sustained trend increases. We really need to see that core inflation start to move,” he said.
Annual growth slowed to 2.7% in 1Q. That’s below the economy’s potential rate, which McDermott said was about 3%. The RBNZ expects the growth rate to dip further to 2.3% in 2Q before recovering to 2.5% in the third.
The 3Q gross domestic product data are due on Dec 20.
“In the September quarter, we’re expecting things to be more back to normal, the fiscal policy starting to get some traction at that point, the net exports to start picking up,” McDermott said. — Bloomberg