Softer tone over cash rate suggested

Cameron Bagrie.
Cameron Bagrie.
The Reserve Bank is widely expected to leave its official cash rate unchanged at 3.5% on Thursday but ANZ chief economist Cameron Bagrie is seeking a softer tone in the bank's commentary.

While the domestic economy continued to roll on, downside risks were more apparent and the New Zealand dollar was at ''eye-watering levels'', showing no sign of letting up.

Core inflation once again undershot expectations and was receding, not accelerating.

The Reserve Bank's sectoral factor model continued to fall. At just 1.3% year-on-year, that was the equal lowest reading on record and the 21st consecutive quarter below the target mid-point, he said.

It was not all one-way traffic. Capacity utilisation was high and Auckland housing strength was tying the central bank's hands until a macroprudential response could be implemented.

''An outright easing bias is a bridge too far. Conditions are ripe for a softer slant on the Reserve Bank's current neutral stance. Dollar strength alone should lead to a reassessment of the outlook for monetary policy.''

A softer tone would come as a surprise to those focused on previous Reserve Bank reluctance, Mr Bagrie said.

It could see the market shift to front-loading more of the easing already priced in as well as help stop the relentless upward march in the dollar.

HSBC New Zealand and Australia chief economist Paul Bloxham said the Reserve Bank was likely to look through last week's low inflation because the key reason for the low figure was petrol prices falling sharply in the six months ended March.

When that effect was ignored, inflation, excluding petrol, was running at 1%, at the bottom of the 1% to 3% target band.

''Given that background, a near-term cut in interest rates might seem like a possibility. However, it is not current inflation but the medium-term outlook that matters to the Reserve Bank. And the strong growth outlook points to higher inflation down the track.''

Economic growth was running at 3.5% at the end of last year, well above trend and recent activity indicators pointed to continued strength in the economy.

Over time, that strength was expected to lower the spare capacity in the economy.

The unemployment rate was expected to fall to about 5% by the end of the year and slowly generate additional domestic wage and inflation pressures, Mr Bloxham said.

Strong growth was expected to continue and that could mean inflation moving up over the next year or two.

Mr Bloxham expected the cash rate to be held steady at 3.5% for all of 2015.

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