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Trade protectionism an uncertainty

NZN 9/02/2017 Paul McBeth

A growing tide of trade protectionism led by US 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 per cent 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.

That has fed into the local market which is pricing in a chance of higher New Zealand rates as early as this year.

Mr Wheeler told a press conference in Wellington the biggest uncertainty was whether Mr Trump would embark on a more protectionist trade policy given the threats he'd made about introducing tariffs.

Tariffs 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 Wednesday 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, RBNZ 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's 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."

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