October 15, 2019 / 11:01 PM / a month ago

New Zealand cenbank says lower rates may be needed; annual inflation slows

WELLINGTON (Reuters) - New Zealand’s central bank signaled more rate cuts, or even unconventional stimulus measures, may be needed to counter global headwinds, as figures on Wednesday showed the country’s annual inflation rate slowed in the third quarter.

FILE PHOTO: Shoppers stand outside a retail store displaying a sales sign in central Wellington, New Zealand, July 3, 2017. REUTERS/David Gray

Inflation fell to 1.5% in the year to end-September from 1.7% previously, Statistics New Zealand said, moving further away from the central bank’s target, but slightly ahead of a 1.4% rise predicted in a Reuters poll of economists.

The Reserve Bank of New Zealand (RBNZ) has already cut its cash rate to a record low, targeting a rise in inflation to the 2% midpoint of its 1-3% target band, as well as keeping employment around its maximum sustainable level.

Speaking shortly after the inflation figures were released, RBNZ Deputy Governor Geoff Bascand suggested in a speech that further interest rate cuts may on the cards.

“Lower rates still may be needed to achieve our inflation and maximum sustainable employment objectives,” Bascand said in a speech to an investment conference in Sydney.

The bank was also undertaking preparatory work on less conventional monetary policy tools in the event that the policy rate is pushed down to its effective lower bound, he said.

The central bank stunned markets in August by cutting the official cash rate (OCR) by 50 basis points to 1.0% and raising the prospect of negative interest rates, but kept the cash rate steady last month.

ANZ Chief economist Sharon Zollner said the RBNZ’s focus will remain on the slowing economy, which will see inflation fall short over the next year.

“To support the inflation outlook, we’re expecting cuts in November, February, and May, taking the OCR down to 0.25%,” she said in a note.

The New Zealand dollar NZD=D4 rose 0.25% after the inflation data, but shed its gains after Bascand's comments.

HIGHER RENTS, PRICES

Inflation rose 0.7% in the September quarter compared with 0.6% in the previous three-month period. The RBNZ had forecast a 0.5% quarterly and a 1.3% year-on-year rate of inflation.

The annual increase was driven by higher prices for rents, cigarettes and tobacco, the statistics agency said. The quarterly CPI increase was due to price rises for local authority rates and payments, vegetables, and meat and poultry, it said. Domestic airfares also shot up.

Annual non-tradable inflation rose sharply from 2.8% to 3.2% – the highest level since 2009.

Kiwibank Chief Economist Jarrod Kerr said the data was above expectations, but the RBNZ needed to do more on the policy front.

“Today’s data just reduces the case that the RBNZ needs to put all 50 bps of stimulus through in November as market pricing has recently suggested was a possibility – albeit a slim one,” Kerr said in a note.

Markets are pricing in a 93% chance of a 25 basis points rate cut at the RBNZ’s next meeting on Nov. 13.

Reporting by Praveen Menon; editing by Sam Holmes and Richard Pullin

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