Record low rates an option for RB

The economy shed several thousand more jobs than were created in the second quarter.

Weak inflation and new job creation could open the door to the prospect of interest rates being cut to new all-time low.

On Thursday Reserve Bank governor Graeme Wheeler will release the last monetary policy statement of his five-year term, which is almost certain to see the official cash rate (OCR) left at 1.75 per cent.

Although Wheeler is not expected to materially change the bank’s stance since the last interest rate review in June, economists predict the central bank may well forecast the OCR will be unchanged for even longer than it has signalled.

In recent days ASB Bank pushed out when it believes the OCR will be lifted from late 2018 to 2019, and predicted that the Reserve Bank may signal no change until 2020.

The OCR is the Reserve Bank’s primary tool to try to keep inflation around 2 per cent, by controlling the cost of borrowing, although as it has fallen to record lows the impact on everyday retail customers has dwindled.

Last month it was revealed that inflation had fallen to zero in the three months to June 30, much weaker than expected.

The New Zealand dollar is also significantly stronger than the Reserve Bank forecast it would be, which tends to push down inflation by making imported goods, especially petrol and food, cheaper.

Then on Thursday the household labour force survey from Statistics New Zealand showed that although unemployment fell to an eight-year low of 4.8 per cent, the economy actually shed several thousand more jobs than were created in the second quarter of the year.

Wage inflation also remained weak.

While none of the major banks are forecasting that interest rates will be dropped, ANZ said a case could be made to signal that the next move could be down.

‘‘Core inflation has softened, activity growth is sub-trend, housing market momentum has slowed a lot, a turn in the credit cycle has tightened financial conditions, the New Zealand dollar has strengthened, and global inflation has rolled over,’’ ANZ chief economist Cameron Bagrie said, adding that there was a ‘‘decent chance’’ inflation could fall back below 1 per cent.

Even before Statistics New Zealand revealed the weak job creation numbers, BNZ said a ‘‘mechanistic approach’’ would argue for a cut in the OCR, with inflation forecasts likely to be below the Reserve Bank’s target ‘‘for some time’’.

BNZ head of research Stephen Toplis said the Reserve Bank had repeatedly stressed in recent months that the risks were evenly balanced on whether its next OCR move would be up or down.

Jeremy Couchman, senior economist at Kiwibank, said the Reserve Bank could delay possible increases, but it would take further weak data before it would consider cutting.

‘‘There are risks [of a cut] if these factors deteriorate further,’’ Couchman said.

‘‘If the currency remains elevated, where it is for an extended period, you start to question, perhaps inflation might start to reverse.’’

ASB chief economist Nick Tuffley said Wheeler may express increased wariness at signs that inflation pressures were easing, but was unlikely to point to a rising chance that the central bank may lower interest rates further.

‘‘We’re probably a long way off that situation at the moment, but ultimately if inflation’s not going to sustain itself ... then you’ve got that risk of a cut.’’