FYI | Jun 09 2006
By Terry Hughes
The chances of an interest rate reduction in New Zealand and time soon look less and less likely by the day.
Although the Kiwi economy is weaker than the RBNZ had been expecting, which would make an interest rate reduction more likely, higher petrol prices and a weaker NZD have heaped pressure on the inflation outlook.
This is a dangerous strategy, Credit Suisse says.
The RBNZ is effectively targeting headline inflation, which is not done by any other central bank in the world, the analysts say, with the focus normally on controlling core inflation.
This, Credit Suisse adds, has resulted in the Kiwi monetary policy "running tighter than it could be, causing a weak economy," as core inflation is falling.
As a result, despite RBNZ claims to the contrary, the analysts wouldn’t be surprised to see an easing of rates later on this year.
Commonwealth Bank, on the other hand, doesn’t see a rate cut happening until the first quarter of 2007 as it expects inflationary pressures (high oil prices) to have calmed by early 2007 and coupled with slower growth this should provide the RBNZ with enough comfort to start easing rates.