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Central bank fears king tide of protectionism

"We think the market assessment has got a bit ahead of itself at this point in time," Graeme Wheeler said

Paul McBeth
Thu, 09 Feb 2017

A growing tide of trade protectionism led by the US under President Donald Trump is one of the biggest uncertainties for New Zealand's Reserve Bank, governor Graeme Wheeler says.

The central bank kept the official cash rate 1.75 percent and adopted a neutral bias, with increases built into the track of the benchmark rate from mid-2019.

The election of Mr Trump and the prospect of deregulation, tax reform, and infrastructure spending has driven up US interest rates on expectations the Federal Reserve will raise interest rates more aggressively than previously anticipated, and that had fed into the local market which was pricing in a chance of higher New Zealand rates as early as this year.

Mr Wheeler told a press conference in Wellington that a neutral bias is "the right position" at this point, with risks to the outlook "evenly balanced", albeit with heightened uncertainty.

"We think the market assessment has got a bit ahead of itself at this point in time," Mr Wheeler said. "We're happy with the track that we have."

Mr Wheeler said the biggest uncertainty was whether US president Trump would embark on a more protectionist trade policy given the threats he'd made about introducing tariffs, and those could have "serious implications for the global economy" in an environment where international merchandise trade volumes were growing at their slowest pace since the early 1980s.

"It would raise inflation rates in the US, the Federal Reserve would need to push harder against rising inflation, so those interest rates would rise, the exchange rate in the US would probably rise, you'd see retaliation by other major countries," he said. "The biggest risk I think is the protectionist risk."

Treasury secretary Gabriel Makhlouf yesterday told Parliament's finance and expenditure committee that increased protectionism was a major risk to New Zealand given the nation's status as a small, isolated and trade-dependent nation. However, he was optimistic it could be overcome as New Zealand's trading partners across the Asia Pacific were more inclined towards freeing up those trade links, with protectionist rhetoric largely in developed western economies.

Speaking to BusinessDesk after the briefing, deputy governor Grant Spencer said those heightened uncertainties made it prudent for central banks to adopt a wait-and-see attitude on how events play out, whereas investors were latching on to the prospect of US fiscal stimulus in driving equity markets higher.

"Markets tend to focus on the more positive things, and as 2017 unfolds we're going to see which of those two main factors predominates," Mr Spencer said. "If there are measures that come out that look like that a trade war is emerging with China, that's the biggest risk – then the markets will probably start interpreting it more negatively."

The Reserve Bank is more upbeat about New Zealand's domestic outlook, with risks to the financial system abating as previously soaring house prices start moderating and robust growth is set to continue.

The bank is still uneasy about the strength of the New Zealand dollar, which dropped half a US cent after the announcement and was recently trading at 72.44USc and 78.84USc on a trade-weighted basis.

Mr Wheeler said the currency needs to decline and was "higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector." When asked whether the conditions were ripe for an intervention, Mr Wheeler declined to say whether it met the criteria to warrant action.

Mr Spencer later said the track for US interest rate increases was expected to push up demand for the greenback, which would "give some relief on the kiwi exchange rate and we think a bit on the TWI as well."


Paul McBeth
Thu, 09 Feb 2017
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Central bank fears king tide of protectionism