New Zealand caught up in the wash of weak global inflation

Thursday, 30 April 2015, 2:44 pm
Press Release: ASB Bank

Media release
ASB Quarterly Economic Forecasts April 2015

New Zealand caught up in the wash of weak global inflation
• NZ’s economy is maintaining a solid pace.
• High exchange rate remains a drawback of a healthy economy.
• The dynamic of a high NZD and low interest rates is causing challenges for the RBNZ.

New Zealand’s economic growth outlook remains broadly positive, with the economy growing at a little above 3 percent according to the latest ASB Quarterly Economic Forecasts.

“Like many other parts of the world, New Zealand is currently experiencing low inflation. The Eurozone in particular has been hit hard by a combination of low oil prices and broader price weakness, which is combining to paint an uncertain picture,” says ASB’s Chief Economist Nick Tuffley.

“But the story here differs and we remain in a comparatively strong position. Both the factors driving New Zealand’s low inflation environment, oil prices and the high NZD, should ease over 2016, giving inflation a chance to rebound.”

“In fact, New Zealand’s economy has established a solid momentum that few developed economies can match at the moment,” says Mr Tuffley. “The ongoing economic challenge is that this growth remains uneven.”

According to Mr Tuffley, the impact of the recent drought will be holding the economy back in the near term.

“The cloud of weak dairy prices is still hanging around. However, New Zealand’s second-biggest foreign exchange earner, tourism, is going from strength to strength.”

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ASB economists expect the high NZD to further reinforce the domestic/export growth divide.

“Exchange rates reflect the relativities of the countries in question and the drawback of having a relatively healthier economy than other countries is a high exchange rate,” says Mr Tuffley. “That currency weakness in other parts of the world is contributing to a low inflation outlook.”

“Much of the low inflation comes from weak prices for tradable goods and services. Key drivers include the fall in fuel prices and the impact of the rising NZD. New Zealand is effectively importing the price impacts of weak demand in other developed economies,” says Mr Tuffley.

The combination of a high NZD, low inflation and low interest rates is creating challenges for the RBNZ as it tries to meet its inflation and financial stability objectives.

“It is pretty clear that the rebound in the housing market since August is no flash in the pan with low interest rates contributing to the heat that is very evident in Auckland. But it isn’t appropriate for the RBNZ to put up interest rates to cool off the housing market.”

ASB economists continue to expect the OCR to remain unchanged. But, with inflation averaging a very low pace in recent years, the risks remain skewed towards OCR cuts.

“We predict that there is a 25 percent chance that the RBNZ will cut the OCR this year. Top of the list of potential catalysts is the high NZD, which has strengthened even further recently,” says Mr Tuffley.

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