The Reserve Bank is forecasting an upsurge in inflation by early 2016, as the effects of earlier petrol price falls drop out of the Consumer Price Index and other prices move in response to the fall in the exchange rate since April.  

Even so, it is taking a watch and wait view of interest rates. 

For the year to the end of September inflation was at 0.4% – well below the Reserve Bank target which is the midpoint of a 0 – 3% range.

 In a statement yesterday, the Bank’s Governor Graeme Wheeler said that inflation remained below the 1 to 3 percent target range, largely reflecting a combination of earlier strength in the New Zealand dollar and the 60 percent fall in world oil prices since mid-2014. 

But despite the low figure, the Bank did not move the Official Cash rate down to stimulate the economy when it did its regular review of the OCR yesterday. 

Instead it is saying that interest rate drop could come in December. 

“To ensure that future average CPI inflation settles near the middle of the target range, some further reduction in the OCR seems likely,” the bank said. 

“This will continue to depend on the emerging flow of economic data. 

 “It is appropriate at present to watch and wait.” 

The ASB’s senior economist, Jane Turner, said The RBNZ was choosing to assess the implications of the rebound in dairy prices, improved confidence and high house prices and balanced against that, the higher NZD. 


“The Bank appears fairly comfortable with the balance of risks for now, with the glaring exception of the higher NZD,” she said. 

But she does not share the Bank’s view that inflation will take off in the New Year, even if the Bank cuts the OCR to 2.5% in December. 

“We remain wary that a 2.5% OCR will not be low enough to sustain inflation as high as 2%,” she said. 

Westpac economist Dominick Stevens said the bank had “kicked the can down the road.” 

He noted that the Bank explicitly linked the exchange rate and interest rate decisions, saying that if the exchange rate sustained its recent rise “a lower interest rate path than otherwise” would be required. 

“The lower exchange rate was the cornerstone of the RBNZ’s argument that inflation would quickly rebound to two percent – clearly, that view has been eroded,” he said. 

“Furthermore, this comment was genuinely new. 

“There was no significant mention of the exchange rate in the Governor’s speech on monetary policy a couple of weeks ago.” 

What all this seems to add up is a caution; that it is unclear whether the economy is set to stage a slight recovery or whether it might simply stall. 

But the Reserve Bank’s uncertainty adds to the importance of the Treasury’s December Fiscal update which will set the tone for much of the way the Government heads into the Budget preparation cycle.