(Bloomberg) -- New Zealand’s economy needs to grow at around 3% a year for the central bank to meet its inflation and employment goals, Deputy Governor Geoff Bascand said.
Speaking to a Wellington business audience Friday after the Reserve Bank cut interest rates earlier this week, Bascand said growth had fallen below it’s potential rate of 2.8%, meaning more spare capacity in the economy and less price pressure.
“We think capacity pressures will just become a little less,” he said. “There is pressure there, there’s just not enough pressure to get inflation up. We need growth to be around 3% or more to keep being at or approaching our targets.”
The RBNZ cut its official cash rate to a fresh historic low of 1.5% on May 8 and left the door open to another reduction if needed to return inflation to its 2% target. There was considerable uncertainty about whether the central bank would loosen policy as New Zealand’s economy is in reasonable shape, in its 10th straight year of expansion and with unemployment of just 4.2%.
The RBNZ projects annual growth will slow to 2% by mid-2019 but rebound to 3.3% by the second quarter of 2020 as demand responds to additional monetary stimulus. Some economists say the central bank may be expecting too much.
The RBNZ forecasts reflect “far more growth response to a quarter-point rate cut than we consider to be plausible,” said UBS New Zealand chief economist Robin Clements. He expects the OCR will drop to 1.25% in August and economic growth of 2.8% by mid-2020.
“Nobody’s talking gloom here,” Bascand said. However, it was “getting a bit harder” for the bank to stay close to its employment and inflation targets.
‘Pump It Up’
“The headwinds have become a bit stronger, the global economy has become a bit weaker, the domestic economy seems to have softened,” he said. “So we think we’re going to be drifting away a little bit, not staying as close, there’s more chance of inflation ebbing than rising. Because of that, we ended up coming to a view that we needed to help pump it up a bit more.’’
While New Zealand’s export prices are strong, that was due to supply-side weakness among competitors, he said, citing soft European milk production. There was more chance of dairy prices easing than holding up.
Business investment was weaker than expected and the bank expected house prices “to remain soft for a while,” Bascand said.
As to whether the RBNZ would need to cut rates again, he said it would be watching how things develop, including the government’s May 30 budget.
“We’ll look ahead and see what happens in the budget, we’ll see how things play out in terms of demand forces, all the uncertainties that I’ve talked about, and decide whether we need to add any stimulus or whether we have sufficient,” Bascand said.
Most economists predict another move later this year, while markets are pricing a 75% chance of a reduction by early 2020.
“Our future forward track still goes down a bit, we’ve still got about just over half a cut built in,” Bascand said. “The assumption the market’s pricing in is we might still see a bit more support. We’ll reassess each time and work out whether we need to deliver that.”
(Updates with economist in sixth paragraph.)
