FYI | Jul 17 2006
By Chris Shaw
The Reserve Bank of New Zealand (RBNZ) finds itself at an interesting juncture, as inflation has risen to a 16 year high to be roughly double the bank’s target rate, yet lifting interest rates to slow the economy and force inflation down is difficult given official rates of 7.25% are already high enough to be restrictive for the economy.
As Stephen Koukoulas of TD Securities notes, adding to the difficult policy mix is a current account deficit of 9% and the inflationary impact of the 15% fall in the New Zealand dollar since late last year, not to mention signs of a global lift in inflation generally.
Inflation in the quarter showed an increase of 1.5%, brining the annual inflation rate for the FY05/06 to 4%, compared to 3.3% annualised in the March quarter.
With recent data indicating the economy is now less likely to experience a hard landing than had been feared a few months ago, Koukoulas suggests there is now zero chance of a cut to interest rates anytime in 2006.
He argues instead there is actually an outside chance of a further hike in rates as unless there is simply a lag between the previous rate increases and their impact on inflation, more may need to be done to stop the inflation rate from continuing to climb.
This outlook of a rate rise being more likely than a fall leads him to favour a relatively strong currency in coming months, his forecast being for the Kiwi dollar to reach a level of about 65c against the greenback.