RBNZ Says Weak Global Inflation Assumption Increases Upside Risk

(Bloomberg) -- The Reserve Bank of New Zealand’s new assumption that global inflation will stay lower for longer means it is more exposed to the risk of prices picking up, Acting Governor Grant Spencer said.

“More recently we have been assuming greater persistence in low global inflation and this is contributing to our current flat track for future OCR levels,” Spencer said in a speech Tuesday in Auckland. “This now puts some risk on the upside for inflation and interest rates.”

The RBNZ currently sees the official cash rate remaining at a record-low 1.75 percent until mid-2019. If global inflation unexpectedly picks up, then the central bank would likely face higher international interest rates, a lower New Zealand dollar and higher traded goods inflation, which would require an earlier interest-rate response.

“The RBNZ is now assuming that weak global inflation will persist,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “This does open up exposure to the opposite risk, that global inflation picks up and lifts New Zealand inflation with it.”

New Zealand’s dollar rose after the speech, buying 68.95 U.S. cents at 3:46 p.m. in Wellington from 68.65 cents immediately before the speech was published.

Rate Cuts?

In his speech, Spencer also outlined the alternative risk that domestic price pressures remain weak and that non-tradables inflation fails to accelerate next year as predicted. Under that scenario, the RBNZ may need to consider rate cuts, he said.

He noted that the central bank’s “flexible inflation targeting approach is becoming more flexible” by putting more weight on growth and employment in the short to medium term.

“In this respect the Reserve Bank’s direction is consistent with the Government’s initiative to introduce a dual mandate for monetary policy,” Spencer said. “However, we should recognize that such an approach can only be sustained if inflation expectations remain low and stable. Monetary policy will only have greater scope to stabilize the real economy if its long term commitment to price stability is maintained.”

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