English says central banks grappling with low inflation; NZ in better position than most as "RBNZ still has room to move if needed"

By Bernard Hickey

Finance Minister Bill English has given his strongest hint yet that he expects the Reserve Bank to cut interest rates further in response to very low inflation, saying the central bank had more room than others overseas to cut if needed.

“Central banks around the world are grappling with very low inflation,” English said in a speech in Auckland hosted by the Auckland Chamber of Commerce and Massey University.

“There is a lot of uncertainty about exactly what is keeping inflation so low, and the implications for our economies. Markets are reflecting an anxiety that economies with zero or negative interest rates can’t rely on central bank interventions as they have in the past,” he said.

“New Zealand is in a better position than most because the Reserve Bank still has room to move if needed.”

English said New Zealand businesses had been resilient in the face of the global financial crisis, Canterbury earthquakes, higher interest rates than the rest of the developed world and a high New Zealand dollar.

“These relatively strong domestic results come despite some ongoing wobbles in the global economy. Uncertainty remains around the impact of US interest rate hikes, China’s rebalancing path looks rocky, and risks around European banks are becoming more apparent,” he said.

English said lower prices were affecting the dairy sector, but dairy exports made up 5% of the economy and the industry had a positive view about its long term prospects. Tourism was doing well and now directly contributed NZ$10.6 billion to the economy or nearly 5% of GDP. Beef and wine exports were strong and the ICT sector was growing 9% per annum, while education now supported 30,000 jobs.

“The number of affluent and upper middle class Chinese households – those that earn over NZ $24,000 – is expected to increase from 44 million in 2012 to 225 million in 2022,” English said.

“This is a big opportunity for New Zealand, given our main exports like dairy, beef, lamb, wine, horticulture and tourism are typically targeted at the wealthier consumer market. So while we can expect continued volatility in global markets, the New Zealand longer-term outlook is sound,” he said.

(Updated with more details on economy)