Cheap oil to boost economy by $2.4b annually

Last year's 50 per cent slump in the price of Dubai crude oil has sapped inflation expectations across the globe and is likely lead to a boon to domestic growth in New Zealand.

New Zealand's national income is expected to get an annual boost of about $2.4 billion as the fight between new energy producers and the Organisation for Petroleum Exporting Countries for market share keep global oil prices low, according to the Reserve Bank.

Last year's 50 per cent slump in the price of Dubai crude oil to about US$55 a barrel has sapped inflation expectations across the globe, and for net importers such as New Zealand, that's likely to be a boon to domestic growth.

The Reserve Bank expects the recent drop in oil prices has already stripped out 0.9 of a percentage point from the annual consumers price index, which was running at a 0.8 per cent pace in December, making input costs for businesses cheaper.

"It also boosts demand growth in the economy: at a national level the fall in the price of imported oil raises New Zealand's purchasing power, as measured by the terms of trade," the bank said in its March monetary policy statement.

"Lower oil prices boost aggregate demand by improving household and firms' purchasing power due to more favourable terms of trade."

OPEC nations decided to maintain their level of supply last year in the face of falling prices as US production grew rapidly with technological advances, such as hydraulic fracturing, reducing the cost of extracting oil and gas in the world's biggest economy.

The US has traditionally been a net importer of oil, but since the advent of fracking, it's likely to be a net exporter in the foreseeable future.

New Zealand's central bank today kept its key rate on hold, and took rate hikes off its forecast horizon out to March 2017 due to the lower inflation track, which stemmed in large part from cheap oil.

"World oil prices are about 50 per cent below their June 2014 peak, more reflecting increased supply than demand factors," Governor Graeme Wheeler said.

"The fall in oil prices is net positive for global economic growth, but will further reduce inflation in the near term, at a tie when global inflation is already very low."

The Reserve Bank said it's allowed to look through the short-term effects on inflation by the slump in oil prices, which represent a one-off change.

However, if that feeds into broader changes in the way firms set prices and wages, or oil prices continue to side, the bank will likely be forced to cut interest rates.