Reserve Bank of New Zealand says easier policy possible on low prices

Investing.com - The Reserve Bank of New Zealand remains vigilant over wages and would consider easing monetary policy if these settle at levels lower than the inflation target, Assistant Governor John McDermott said Thursday.

"Evidence of weakening demand and domestic inflationary pressures would prompt us to consider lowering interest rates. There are some areas of uncertainty surrounding the outlook for capacity pressures, including the lingering effects of the recent drought in parts of the country, fiscal consolidation, lower dairy incomes and the impact of the high exchange rate on some export and import substitution industries," McDermott said.

The RBNZ is also assessing the outlook for tradable inflation that is being dampened by global conditions and the high exchange rate, McDermott said. "The fact that the exchange rate has appreciated while our key export prices, such as dairy, have been falling, is unwelcome."

"The timing of future adjustments in interest rates will depend on the evolution of inflationary pressures in both the traded and non-traded sectors. We continue to monitor and carefully assess the emerging flow of economic data," McDermott said, even as he ruled out prospect of increase in the official cash rate in the near term.

"At present, the bank is not considering any increase in interest rates. Before considering any tightening in monetary policy we would need to be confident that increased capacity utilisation and labor market tightness was generating, or about to generate, a substantial increase in inflation," McDermott said.

In fact, the outlook for inflation requires a period of supportive monetary policy, McDermott said.

"Our approach, as a flexible inflation targeter, is to support ongoing sustainable growth in New Zealand that should help raise costs and prices in order to achieve our inflation target. We will not react to temporary deviations from target, as this will only generate unnecessary volatility in activity," he said.