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1st LD Writethru: New Zealand central bank holds interest rate as inflation flatlines

Xinhua, March 12, 2015 Adjust font size:

New Zealand's central bank left the official cash rate (OCR) unchanged at 3.5 percent Thursday, saying consumer price inflation was expected to fall to around zero in the March quarter.

Inflation was expected to remain low over the rest of the year, reflecting the high exchange rate, low global inflation and recent falls in petrol prices, Reserve Bank of New Zealand (RBNZ) Governor Graeme Wheeler said.

Inflation expectations appeared to have fallen recently and the RBNZ was taking a neutral stance on future OCR movements.

However, the central projection was consistent with a period of stability in the OCR, Wheeler said in a statement.

"Inflation expectations appear to have fallen recently, and we will be closely monitoring the impact of this trend on wage and price setting behavior, especially in the non-traded sector," he said.

Monetary policy remained focused on ensuring inflation settled at the 2-percent mid point of the target range of 1 percent to 3 percent over the medium term.

Trading partner growth in 2015 was expected to continue at a similar pace to 2014, with growth remaining robust in the United States, but slowing recently in China, and the domestic economy remained strong.

"The fall in petrol prices has increased households' purchasing power and lowered the cost of doing business," said Wheeler.

Employment and construction activity were strong, net immigration remained high, and the housing market was showing signs of picking up, particularly in the biggest city of Auckland.

"However, there are a number of factors weighing on domestic growth, including drought conditions in parts of the country, fiscal consolidation, reduced dairy incomes, and the high exchange rate," said Wheeler.

"On a trade-weighted basis, the New Zealand dollar remains unjustifiably high and unsustainable in terms of New Zealand's long-term economic fundamentals," he said.

"A substantial downward correction in the real exchange rate is needed to put New Zealand's external accounts on a more sustainable footing." Endi