October 13, 2016 / 7:36 AM / 9 months ago

New Zealand's central bank still seen cutting rates despite booming economy

3 Min Read

Two people walk towards the entrance of the Reserve Bank of New Zealand located in the New Zealand capital city of Wellington, March 22, 2016.Rebecca Howard/Files

WELLINGTON (Reuters) - A raft of positive data confirmed New Zealand is benefiting as one of the developed world's fastest-growing economies, yet the central bank is still expected to cut rates next month as inflation remains far below its target.

Data on Thursday showed a rise in manufacturing activity, consumer confidence at a more than 15-month high, an ongoing pickup in job creation plus a government budget surplus over NZ$1 billion ($715.8 million) higher than forecast for the year ended June 30.

"Despite international turbulence and global uncertainty, New Zealand is in the unusual position of enjoying solid growth, rising employment and real wages at the same time as low inflation," Finance Minister Bill English said when presenting the government's books.

The surplus for the past fiscal year was NZ$1.83 billion ($1.31 billion), far outstripping the government's May forecast of NZ$668 million.

The second consecutive annual surplus was boosted by a NZ$3.8 billion rise in core tax revenue on solid growth. In April-June, New Zealand grew 3.6 percent from a year earlier, and Thursday's data indicated there's no sign of slowing.

Still, most economists expect the central bank to cut rates to an all-time low of 1.75 percent on Nov. 10 in a bid to jump-start inflation.

"Despite the growth backdrop arguing for no cuts, this soft inflation environment leaves the official cash rate biased to the downside, with the 3Q CPI figures unlikely to stand in the way of a November cut," said ANZ senior economist Philip Borkin.

New Zealand's central bank is mandated to keep annual inflation in a 1-3 percent band, with a focus on the midpoint.

Very Low Inflation

Economists tip third quarter annual inflation, to be reported next week, of 0.1 percent or lower. Annual inflation was 0.4 percent in the second quarter.

A 0.9 percent fall from a month earlier for September food prices, announced on Thursday, strengthened the view a November cut is a done deal.

Even rising house prices are becoming slightly less of an issue, data Thursday showed, further paving the way for rate cuts.

The central bank has long voiced concern about New Zealand's hot housing market, where prices have increased 15 percent over the past year and Auckland's house price-to-income ratio is among the world's highest.

However, housing market activity cooled a bit in September as central bank lending curbs appear to have reduced heat.

Seasonally adjusted house prices last month rose 3 percent versus August nationwide but eased 2 percent in Auckland.

ASB chief economist Nick Tuffley, who anticipates a 25 basis point rate cut in November, said he expects the lending curbs to continue to suppress market activity the rest of this year.

($1 = 1.3970 New Zealand dollars)

Reporting by Rebecca Howard; Editing by Richard Borsuk

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