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1st LD Writethru: New Zealand's central bank holds interest rate in face of slowing inflation

Xinhua, January 29, 2015 Adjust font size:

New Zealand's central bank left the official cash rate (OCR) unchanged at 3.5 percent Thursday, citing falling oil prices as a drag on low inflation and the possibility of deflation in the near future.

Reserve Bank of New Zealand (RBNZ) Governor Graeme Wheeler also warned the country's strong dollar was still at an unjustified and unsustainable exchange rate despite easing recently.

World oil prices had fallen 60 percent since June last year, which, together with uncertainties around the transition of U.S. monetary policy, had led to an increase in financial market volatility, Wheeler said in a statement on the six-weekly OCR review.

"The lower oil price will have a significant impact on prices and activity in New Zealand. The most direct and immediate effects are through fuel prices, with the price of regular petrol falling from a national average of 2.23 NZ dollars (1.64 U.S. dollars) in mid-2014 to 1.73 NZ dollars (1.28 U.S. dollars) currently. This will increase households' purchasing power and lower the cost of doing business," he said.

Headline annual inflation was expected to be below the RBNZ's target band of 1 percent to 3 percent through 2015, and "could become negative for a period before moving back towards 2 percent, albeit more gradually than previously anticipated," said Wheeler.

Annual economic growth was above 3 percent, supported by rising construction activity and household incomes, but fiscal consolidation, falling dairy incomes, the risk of drought and the high exchange rate would weigh on growth.

"While the New Zealand dollar has eased recently, we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand's long-term economic fundamentals. We expect to see a further significant depreciation," he said.

The high exchange rate, low global inflation, and falling oil prices were causing traded goods inflation to be very weak, while non-tradables inflation remained moderate, despite buoyant domestic demand and an improving labor market.

Trading partner growth this year was expected to be similar to 2014, though the outlook was weaker than anticipated last year, with growth in China, Japan and the euro area easing in recent quarters, and growth in the United States remaining robust, Wheeler said. Endi