Wheeler says some OCR easing likely but wants to avoid stoking property demand
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Reserve Bank governor Graeme Wheeler has reiterated that he is likely to cut interest rates again, although he is also conscious of the risk that low borrowing costs inflame the housing market and wants to retain some capacity to ease policy in the event of a global downturn.
Mr Wheeler told the Institute of Finance Professional NZ annual conference in Auckland that the global economy "is in a difficult configuration, with growth slowing in the developing world, unprecedented monetary accommodation, and prospects of tighter monetary conditions in the US, and further easings in the euro-area and Japan." The central bank needed to have "sufficient capacity to cut interest rates if the global economy slows significantly," he said.
Recent economic indicators had been "more encouraging," he said. "Some further easing in the OCR seems likely but this will continue to depend on the emerging flow of economic data."
The comment on further easing being likely echoes his wording in the monetary policy statement on September 10, where he cut the official cash rate a quarter point to 2.7% and indicated he had a further cut of that magnitude up his sleeve. He next reviews interest rates on October 29, before the next full Monetary Policy Statement on December 10.
The speech, titled 'Some reflections on the world of central banking', sets out some of the arguments that would mitigate against cutting rates again soon. They include the risk of fuelling the housing market in Auckland, by contributing to lower mortgage interest rates. He has previously said the overheated Auckland housing market was a threat to the nation's financial stability because of the risk of a correction.
"We remain conscious of the impact that low interest rates can have on housing demand and its potential to feed into higher price inflation," he said. He also noted that while financial stability considerations were secondary to the price stability target in his policy targets agreement with Finance Minister Bill English, "housing market considerations do influence our thinking on the OCR."
House prices in Auckland have surged at a 26% annual rate and the price-to-income ratio for the city is twice that of the rest of the country.
The kiwi dollar slipped to 66.44USc from 66.60USc before the speech was released. Before today, traders saw a 7% chance of Wheeler cutting the OCR at the October 29 review, based on the overnight interest swap curve, with 38 basis points of cuts seen over the next 12 months.
Mr Wheeler said the central bank's inflation targeting framework and PTA were "a sound anchor for policy in this uncertain world" where economic growth is the weakest since 2009 and inflation among the 30 nations with central banks that target price stability has been below target for the past few years. But "judgement in managing and balancing risks plays a critical role."
Government figures due on Friday are expected to show inflation was just 0.2% in the third quarter, matching the expected annual rate, which is well below the 2% midpoint of the central bank's 1-3% range.