New Zealand central bank signals possible interest rate cut

Near-zero inflation could force New Zealand's central bank to cut interest rates, a senior Reserve Bank of New Zealand official said Thursday, despite its fears that soaring house prices are threatening the country's economic and financial stability.

RBNZ assistant governor John McDermott said the bank was currently not considering raising its official cash rate (OCR) and it would ensure that monetary policy was stimulatory to help lift inflation back to the bank's 1-3 percent target range.

The country's near-zero inflation was mostly due to low tradables inflation, caused by the slow global economic recovery, the high exchange rate and recent sharp falls in oil prices, McDermott said in a published speech to business groups in Hamilton.

The impact of some of those factors would be temporary, and as oil prices stopped falling, they would cease to be hold down inflation by the start of next year.

Stimulating output growth above potential would help lift non- tradables inflation, returning headline inflation gradually to the target midpoint.

"Growth is currently underpinned by high net immigration, strong employment and construction activity and robust household spending," said McDermott.

"Evidence of weakening demand and domestic inflationary pressures would prompt us to consider lowering interest rates," he said.

"There are some areas of uncertainty surrounding the outlook for capacity pressures, including the lingering effects of the recent drought in parts of the country, fiscal consolidation, lower dairy incomes and the impact of the exchange rate on export and import substitution industries."

He described the high exchange rate -- repeatedly described by the RBNZ as unsustainable and unjustifiable -- as unwelcome at a time when key export prices, such as dairy, were falling.

Last week, RBNZ deputy governor issued a thinly veiled call for the government to implement a capital gains tax on housing which the bank has said threatens financial and economic stability.

The RBNZ introduced tighter mortgage lending requirements in October 2013 and has kept the OCR at 3.5 percent despite inflation falling below the target range.

The next OCR review is scheduled for April 30.