(Bloomberg) -- New Zealand’s central bank could cut interest rates as soon as February if signs of an expected economic pickup fail to materialize, Deputy Governor Geoff Bascand said.
“We actually think the economy is somewhere near a turning point,” Bascand said in an interview in Wellington on Thursday. “We’ve put a lot of stimulus in. We’ve got a bit longer to see how it’s transmitting. There’s time to see how that plays out and make a call in February if needed.”
The Reserve Bank surprised markets yesterday by holding its cash rate at 1% -- defying predictions of a cut -- and forecasting a robust economic pickup next year. By the time of its next rate decision on Feb. 12, the bank will have important additional information to add to its projections, including its own decisions on proposed bank capital hikes and the government’s half-year economic and fiscal update.
The RBNZ has cut rates by 75 basis points this year amid slowing economic growth and as inflation remains stuck below the 2% midpoint of its 1-3% target. Governor Adrian Orr said earlier Thursday that yesterday’s decision was a tough one, and that the monetary policy committee had debated whether to “take one more insurance cut.”
Bascand said the economy is “definitely going through a weaker stage, but we’re expecting still that the amount of stimulus there in the economy is going to pull it up.”
“We’re looking for an acceleration in the economy,” he said. “We acknowledge it needs to pick up to get inflation up there, and if it doesn’t we’ll do more.”
Near-term risks “are probably more on the downside, but it’s a question of how long they persist,” he said.
‘We Don’t Aim to Surprise’
Asked about market reaction to yesterday’s decision, which saw New Zealand swap rates jump the most in a decade and the kiwi dollar surge, Bascand said: “We don’t aim to surprise.”
“We’re committed to doing what we need to do, and try to signal what is likely if it’s likely or what factors in particular that we’re considering where it’s uncertain,” he said. “The problem is that sometimes people think if you’re on an easing path you keep going on an easing path.”
He urged markets to focus on what the bank needs to do to achieve its objectives, and not to get too focused on single issues.
Bets on a rate cut firmed on the eve of the rate decision after the RBNZ published a survey showing a drop in inflation expectations.
“We pay heed to inflation expectations, we wouldn’t want to see them become entrenched at low levels,” Bascand said. “But do you get overly anxious on a little dip in some short-term expectations? We would say not. Watch it and be a bit wary about it, but we think the short-term ones mostly follow inflation, and it’s just one of a whole suite of indicators that we look at to assess the outlook.”