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New Zealand Won’t Rush to Raise Rates, Comfortable With More Inflation

Matthew Brockett and Tracy Withers

(Bloomberg) -- New Zealand’s central bank would be comfortable with inflation above the midpoint of its 1-3% target range and will hold interest rates at a record low for a prolonged period even if economic growth accelerates, Assistant Governor Christian Hawkesby said.

“It would be healthy if people experienced some inflation above the 2% midpoint, just to illustrate that the full width of the range is available,” Hawkesby said in an interview with Bloomberg Thursday in Wellington. “We’re absolutely comfortable with using the inflation range.”

The Reserve Bank yesterday kept its official cash rate at 1% as expected, but surprised markets with forecasts that removed the possibility of a rate cut this year and presented an upbeat economic outlook. Hawkesby said the RBNZ has a “genuine neutral bias” on rates, and “a genuine openness about where things go from here.”

The bank took a surprisingly sanguine view of the economic impact of the coronavirus outbreak, which has seen New Zealand close its borders to Chinese tourists and students. It estimates the disruption will last just six weeks and shave only 0.3 percentage point off first-quarter growth. Hawkesby said the bank will reassess its assumptions as events unfold.

“If things are a lot worse, then the projections will look different and the policy response will look different,” he said. “At the moment the markets are probably more relaxed than they were earlier in the month. But equally we know that it’s asymmetric. If the median is six weeks it can’t be a whole lot shorter than that but it could be quite a lot longer.”

The RBNZ yesterday said that employment was at or slightly above its maximum sustainable level, while inflation is likely to sit at or below 2% over the forecast period. It projects the economy will grow 3.1% this year, up from an estimated 1.6% in 2019.

“Growth weakened in 2019 and our projection is the labor market is going to soften in the years ahead so we need to be leaning against that by keeping rates low,” Hawkesby said.

Benign Inflation

As the economy grows it will start to use up the existing spare capacity, which may eventually stoke faster inflation. But Hawkesby said inflation has been below the midpoint of the RBNZ’s target range for so long that it wants to see it persistently around 2%, or even higher, before it would contemplate raising rates.

“When you’re in a period when there is no spare capacity left and we haven’t had inflation below target for a long time then you are in an environment where it’s safer to start lifting interest rates,” he said. “We’re not close to that time. We’ve still got a long period when we can wait and watch.”

While the central bank’s cash rate projections signal the chance of a rate rise from mid-2021, Hawkesby said he “wouldn’t pay a whole lot of attention” to that. The key message is that “we can stay on hold, keep rates low for a long time,” he said.

The RBNZ’s growth forecasts surprised some private-sector economists who see growth of less than 2.5% this year. Hawkesby said the central bank expects household consumption will be strong, buoyed by the wealth effects from rising house prices, which was the main difference in its projections.

“Consumption is two thirds of GDP, it’s a big chunk, so what assumption and views you have around that are going to be driving that core view,” he said.

(Updates with Hawkesby comments from eighth paragraph)

To contact the reporters on this story: Matthew Brockett in Wellington at mbrockett1@bloomberg.net;Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net

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