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Another rate cut may be needed: Wheeler

NZ NewswireNZ Newswire 10/08/2016 By Paul McBeth

Reserve Bank governor Graeme Wheeler has signalled another interest rate cut will follow a quarter-point reduction, and that he may need to plumb ever-lower depths if the kiwi dollar continues to fly against projections or inflation expectations stay muted.

Mr Wheeler reduced the official cash rate 25 basis points to a record low 2 per cent on Thursday and said further policy easing may be required to ensure that future inflation settles near the middle of 1 to 3 per cent target range.

"The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector," Mr Wheeler said.

"This makes it difficult for the bank to meet its inflation objective. A decline in the exchange rate is needed."

However, the kiwi rose from US72.02c to as high as US73.41c after Thursday's monetary policy statement was released, before dropping back to US72.64c

Some traders were disappointed Mr Wheeler wasn't as aggressive as he could've been.

Consumer prices rose an annual 0.4 per cent in the June quarter, its seventh quarter below the band with the strong kiwi's deflationary effect being compounded by last year's slump in oil prices.

The central bank has pushed out its timeframe for returning headline inflation to its 2 per cent midpoint target by a year.

The kiwi dollar has been a thorn in the central bank's side by making imports cheaper, and if the bank's assumption that it will depreciate doesn't emerge Mr Wheeler will have to cut interest rates even more.

The bank's other concern is if inflation expectations decline further and become embedded into long-term projections.

Mr Wheeler again noted house prices were rising at an "excessive" pace, though new macro-prudential tools to limit riskier lending were seen as mitigating the threat to the financial system.

The bank's growth forecasts were kept largely intact, and Mr Wheeler said the domestic economy was continuing to be supported by strong inward migration, tourism, the construction sector, and low interest rates.

Still, farm spending was down due to low dairy prices, and the increased labour supply meant wages stayed subdued.

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