Graeme Wheeler, head of the Reserve Bank of New Zealand (RBNZ), on Wednesday signalled further cuts to the interest rates, but dampened speculation that the country was headed into recession.
RBNZ Governor Graeme Wheeler said further monetary easing was required to maintain New Zealand's economic growth around its potential and to return consumer price index to its medium-term target level of about 2 percent, reported Xinhua.
Further depreciation of the New Zealand dollar was also necessary, given the weakness in export commodity prices and the projected deterioration in the country's net external liabilities over the next two years.
New Zealand's terms of trade were at a 40-year high in mid 2014, but over the past 15 months the economy had experienced several shocks, Wheeler said in a published speech to exporters and business people in the North Island city of Tauranga.
Export prices for whole milk powder had fallen 63 percent since February 2014, and oil prices were more than 50 percent below their June 2014 level.
Net immigration and labour force participation were at historic highs, and the real exchange rate had declined steadily since April 2015.
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Several risks and uncertainties around the inflation outlook included the future path of the exchange rate, which would be influenced by commodity prices, and the speed with which depreciation fed through to higher inflation.
"At current levels of export prices, a more substantial exchange rate depreciation will be required to stabilize the net external liabilities position relative to GDP," said Wheeler.
Current monetary policy settings were providing stimulus to the economy at a time when output looked to be growing around 2.5 percent, slightly below potential, and core inflation remained a bit below the mid-point of the RBNZ's target range of 1 percent to 3 percent.
Earlier this month, the RBNZ made its second 25-basis-point cut to the official cash rate (OCR) in six weeks, bringing the OCR to 3 percent.
Wheeler cited slowing growth and low inflation as the reasons.
But on Wednesday, he said several factors appeared to be supporting growth ahead of the next OCR review in September.
"These include the easing in monetary conditions, continued high levels of migration and labour force participation, ongoing growth in construction and continued strength in the services sector."