RBNZ's Wheeler sees 'continued strong economic growth', higher inflation, but with some risks

Reserve Bank governor Graeme Wheeler. Photo / Mark Mitchell

Reserve Bank governor Graeme Wheeler says the prospects are good for "continued strong growth" in the New Zealand economy in the next 18 months, with monetary policy accommodative enough to ensure inflation picks up after holding at unusually low levels for two years.

"The low point for CPI inflation has probably passed and, supported by the improvement in global commodity prices in recent months, we expect the December quarter 2016 CPI data to confirm that annual CPI inflation is moving back within the 1 to 3 per cent target band," Wheeler said in a speech in Greymouth this morning.

In the absence of major unanticipated shocks, economic growth was likely to be "driven by construction spending, continued migration, tourist flows, and accommodative monetary policy."

In the November monetary policy statement, the RBNZ cut the official cash rate to a record low 1.75 per cent while signalling no further cuts to the benchmark rate. It projected annual inflation to quicken to 1.1 per cent in the final quarter of 2016, following eight quarters where the rate was below the 1 per cent-to-3 per cent target band.

"Relative to the trends over the past two decades, New Zealand is experiencing stronger economic growth, lower inflation, and a lower unemployment rate - even with record levels of labour force participation," Wheeler said in speech notes published on the RBNZ website.

Supply disruptions as a result of the Kaikoura earthquake were unlikely to have a major impact on overall economic growth, he said.

Still, he added that after eight years of growth, the economy's overall expansion "is weaker than other post-WWII expansions" and was characterised by low per-capita economic growth and labour productivity, higher house price inflation than was desirable and a kiwi dollar that is "higher than the economic fundamentals would suggest is appropriate."

Wheeler said 2017 will bring "considerable political and economic uncertainties.

"The greatest threat to the expansion lies in possible international political and economic developments and their implications for the global trading environment," he said. "The main domestic risk - and one that could be triggered by developments offshore - is a significant correction in the housing market.

The greatest threat to the expansion lies in possible international political and economic developments and their implications for the global trading environment.

Numerous measures indicate that New Zealand house prices are significantly inflated relative to usual valuation indicators."

The kiwi dollar climbed to 71.59 US cents after the speech was released, from 71.46 cents immediately before. The trade-weighted index rose to 78.39 from 78.30 and is above the average 76.8 level the RBNZ projected in last month's MPS.

The consumers price index rose 0.3 per cent in the third quarter and the RBNZ expects CPI to rise 0.2 per cent this quarter.

"As has been the case in several other countries, monetary policy has been made more challenging in New Zealand by low global inflation and zero or negative policy rates in several major economies," Wheeler said.

"This has put downward pressure on our interest rate structure and contributed to asset price inflation and upward pressure on the New Zealand dollar. This trend may finally be turning."