Dollar rises as governor calls for fall
Reserve Bank governor Graeme Wheeler says interest rates are likely to come down further and the New Zealand dollar needs to fall too, given the slump in dairy export prices.
But Wheeler also threw cold water on any expectations of extreme rate cuts, after some economists tipped the official cash rate could be slashed another 100 basis points to 2 per cent.
That would only be needed if the economy moved into recession, Wheeler said.
Despite his attempt to talk the currency down, the New Zealand dollar blipped up almost half a cent initially and was trading above US67.1c by lunchtime.
Economists said Wheeler’s speech was in line with the Official Cash Rate being cut to 2.75 per cent in September and perhaps 2.5 per cent, by October. Wheeler cut the cash rate to 3 per cent last week.
In a speech to ExportNZ in Tauranga on Wednesday, Wheeler said that the economy was currently growing about 2.5 per cent a year.
To maintain growth around its potential and return inflation to its target level ‘‘some further monetary policy easing is likely to be required’’, he said.
But he appeared to hose down any expectations of large cuts to official interest rates, saying there were still factors supporting the economy.
He said that some local commentators have predicted large declines in interest rates over coming months that could only be consistent with the economy moving into recession.
‘‘We will review our growth forecasts in September Monetary Policy Statement but, at this point, we believe that several factors are supporting economic growth. These include the easing in monetary conditions, continued high levels of migration and labour force participation, ongoing growth in construction, and continued strength in the services sector.’’
ASB economists said Wheeler’s speech showed the central bank still ‘‘keenly desires’’ a lower New Zealand dollar.
But he also explicitly dampened expectations of ‘‘exuberant’’ interest rate cut expectations. ASB said it still expected rates to be cut in both September and October, taking the rate down to 2.5 per cent.
Westpac senior economist Michael Gordon said the speech showed the Reserve Bank was prepared to cut rates again in September, but seemed to be ‘‘on the fence’’ about a further cut this year, which was in line with market pricing.
The speech also suggested that Wheeler was not inclined to cut rates by more than 25 basis points in one move.
But Gordon said Westpac remained ‘‘comfortable’’ calling for a low point of of 2 per cent for the official cash rate. That was not based on a forecast of recession, but what was needed to meet the Reserve Bank’s inflation target.
On Tuesday, economists said that with the ‘‘relentless’’ falls in global dairy prices, the Reserve Bank was likely to cut official interest rates to 2.5 per cent by October, back to its record lows.
BNZ economists said given recent developments including the dairy decline, it now expected the Reserve Bank to deliver ‘‘at least one more cut’’ to interest rates.