22 Jul 2016

Reserve Bank move could raise inflation

7:09 am on 22 July 2016

Economists are optimistic the Reserve Bank might achieve its goal of actually raising inflation with its latest remarks.

Reserve Bank of New Zealand

Reserve Bank of New Zealand Photo: RNZ / Alexander Robertson

In a kind of half-time comment - midway between official interest rate announcements - the Reserve Bank yesterday spoke of a fragile world economy, a too-high New Zealand dollar, and short term inflation prospects that are way too low.

It signalled it would lower interest rates.

Several economists including ASB's Kim Mundy said they hoped this would bring down the value of the New Zealand dollar to put exporters in a better position.

It might not, however, help home buyers too much.

"The announcement is likely to see the RBNZ cutting interest rates in August and we might see more interest rate cuts in the future," Ms Mundy said.

09062016 Photo: RNZ/Rebekah Parsons-King. Governor of the Reserve Bank of New Zealand, Graeme Wheeler delievers lastest OCR annoucement.

Governor of the Reserve Bank of New Zealand, Graeme Wheeler Photo: RNZ / Rebekah Parsons-King

Yesterday's comments would bring down a New Zealand dollar that the Reserve Bank said was 6 percent higher than it thought it would be, and that would help exporters, she said.

It would also help deal with short term inflation, which Westpac economist Satish Ranchhod said was not too high - at 0.4 percent annually.

"With inflation running at such low levels, the RBNZ is going to face a tough time," he said.

"As a result it is likely they are going to cut again in August and there is a risk that the OCR may need to go lower further out."

Earlier this week, official data showed consumer prices rising 0.4 percent in the three months to June, with the annual rate at the same level. Inflation has been outside the RBNZ's 1-3 percent band for nearly two years.

The risks of low inflation have been overlooked after decades of worry about high inflation.

Ms Mundy said low inflation was a real danger.

"When inflation is too low people can start to defer their spending," she said.

'If they think prices are going to get cheaper in the future, why spend now when you can spend tomorrow and get more for your money.

"That stops people going out and spending, businesses do not thrive and the economy does not grow as well."

As well as boosting inflation to around 2 percent - the desired level - a cut in the Official Cash Rate should put more money into people's pockets, according to Scott Fisher of Retail New Zealand.

That meant they could have more money to spend, especially in the lead up to Christmas.

Bryan Thomson of the Real Estate Institute hoped there might be a benefit for home buyers and home owners, stemming from lower interest rates.

But Christine Lockie of mortgage broking firm Loan Plan sounded a note of caution saying the actual interest rates paid by ordinary people do not always fall as fast as the OCR does.

Get the RNZ app

for ad-free news and current affairs