31 Aug 2016

More interest rate cuts needed to increase inflation - NZIER

10:40 am on 31 August 2016

The Reserve Bank will have to cut interest rates twice more to 1.5 percent to nudge inflation back into its target band in a strongly growing economy, according to the Institute of Economic Research (NZIER).

The Reserve Bank of New Zealand

NZIER expects the Reserve Bank to keep cutting interest rates. Photo: RNZ / Alexander Robertson

The think tank's latest quarterly economic predictions are forecasting growth of around 3 percent over the next couple of years, driven by construction and tourism, while the relatively high New Zealand dollar will help to keep a lid on inflation.

"We do not expect annual inflation to edge back into the Reserve Bank's 1-3 percent inflation target band until the first half of next year," said NZIER senior economist Christina Leung.

She said this would prompt the Reserve Bank to keep cutting interest rates.

"We expect a rate cut in November, and beyond that, despite some uncertainty about how quickly they will do it, we think another one by the middle of next year."

Ms Leung said there was a downside risk that the Reserve Bank might feel the need to cut below 1.5 percent, but the central bank would also be wary of the economic distortions that might cause.

She said the global outlook was being clouded in the short term by the effect of Britain's vote to leave the European Union, the US presidential election, and how China manages the slowdown in its economy.

The New Zealand dollar is also expected to fall against the US dollar, eventually to below 70 cents, as the Federal Reserve raises its interest rates.

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