The New Zealand official cash rate will remain unchanged at a record low 2.
5 per cent after a review by the Reserve Bank but the door has been left ajar for future rate cuts.
Governor Graeme Wheeler said uncertainty about the strength of the global economy had increased adding that, despite a predicted strengthening of the domestic economy, rates may need to be cut.
“Monetary policy will continue to be accommodative. Some further policy easing may be required over the coming year,” he said.
Figures last week showed the consumer prices index increased just 0.1 per cent in 2015 – a 16-year low – and below the bank’s annual target range of 1-3 per cent.
Mr Wheeler said inflation is tipped to increase in 2016 but will take longer to reach the target range than previously expected.
In December, the bank forecast annual inflation rising back within the target band in the March quarter of this year.
Mr Wheeler on Thursday said annual core inflation, which strips out temporary price movements, was within the target range, and that inflation expectations were stable.
The economy is expected to pick up this year, he said, due to persistently strong inbound migration, high levels of tourism, an elevated level of construction work, and improving business and consumer confidence.
The New Zealand dollar fell to 64.32 US cents from 64.71 cents immediately before the statement’s release.
Mr Wheeler said there were still a number of risks threatening the outlook, including the prospects for global growth and China in particular, international financial market conditions, dairy prices, the country’s strong net inbound migration, and pressures in the housing market.
House price inflation was showing signs of abating since the Reserve Bank imposed lending curbs on investor-buyers and the government rolled out plans to tax property more stringently, Mr Wheeler said it was too early to tell whether the rate of increase was moderating.
He said the recent volatility in financial markets had pushed down the kiwi dollar and market interest rates, but “a further depreciation in the exchange rate is appropriate”.
ASB said it the wake of the announcement that it still expects the official cash rate to be cut by 50 basis points in 2016 and the first cut could come as soon as March.