January 29, 2015 / 2:35 AM / 5 years ago

UPDATE 2-NZ central bank holds rates, opens door to possible easing

* Official cash rate held at 3.50 pct, as expected

* RBNZ expects to stay on hold for “some time”

* RBNZ says next move could be “up or down”

* Inflation expected to be lower for longer (Adds poll, updates prices)

By Gyles Beckford

WELLINGTON, Jan 29 (Reuters) - New Zealand’s central bank on Thursday opened the door to a possible rate cut in the face of low inflation and an uncertain global outlook, sending the kiwi dollar to a near-four year low.

The Reserve Bank of New Zealand (RBNZ) held its cash rate steady at 3.5 percent as expected, but said inflation was set to remain lower for longer even though the economy was growing strongly, meaning there was no need to change rates.

“In the current circumstances, we expect to keep the OCR on hold for some time,” RBNZ Governor Graeme Wheeler said in a statement, as he dropped the explicit tightening bias of the December statement.

“Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.”

The RBNZ’s shift to a neutral tone followed surprise monetary easings in Canada and Singapore over the past week, and a bigger-than-expected bond-buying stimulus programme by the European Central Bank, as policymakers globally respond to the threat of deflation from collapsing oil prices and faltering growth.

Wheeler said the outlook for major trading partners, except the United States, was weaker. Indeed on Wednesday, the Federal Reserve struck an upbeat note on the U.S. economy, skirting tottering economies in Europe and Asia.

“The RBNZ is going with the global flow - as far as a still-strong domestic economy will allow,” said ANZ chief economist Cameron Bagrie.

The New Zealand dollar hit a near four-year low of $0.7316 before trimming its losses to last trade around $0.7345. The RBNZ repeated its now-standard warning about the currency’s was unjustifiable and unsustainable level and the risk of further “significant depreciation”.


The central bank said inflation, which slowed to 0.8 percent in the year to December, might turn negative at some stage and would stay below the 1-3 percent target band through 2015, before moving more slowly than previously expected back to 2 percent.

“They have effectively moved to a neutral bias for the foreseeable future,” said Ben Jarman, a senior economist at JP Morgan.

A Reuters poll after the decision saw 11 of 15 economists picking the next move to be a rate rise in the first half of next year, or even later, and three seeing a rate rise in the last quarter of this year. One respondent was picking rate cuts from June this year.

Further rate hikes are eventually expected because of the strength of economic growth, and the RBNZ not wanting to boost a housing market which is showing renewed signs of heating up.

Financial market pricing sees a 28 percent chance of a rate cut in March, and 20 basis points of cuts over the next 12 months.

Wheeler said the economy was growing at more than 3 percent, supported by strong construction activity and household incomes, but faced headwinds from sharply lower dairy prices, the risk of drought, and the high exchange rate. (Editing by Andrew Roche & Shri Navaratnam)

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