Reserve Bank: Dairy slump could get worse

  • 29/07/2015
Reserve Bank: Dairy slump could get worse

New Zealand's central bank has warned that a prolonged slump in dairy prices could get worse, forcing interest rates down to maintain growth in the farm-reliant economy.

Reserve Bank of New Zealand governor Graeme Wheeler said today the price of whole milk powder had plummeted 63 percent since February 2014 and was still under pressure.

"High stockpiles of whole milk powder in China, the increase in global milk supply, and the trade diversion issues involving Russia make for a very uncertain future, with the potential for further downward pressure on global dairy prices," he said.

The Reserve Bank keeps a close eye on milk prices because New Zealand is the world's largest dairy exporter, selling some NZ$15 billion a year, about a third of the country's entire exports.

Wheeler said falling commodity prices were a factor behind two interest rate cuts of 0.25 percentage points each, the most recent last week, which took the base rate to 3.0 percent.

"At this point, some further easing seems likely," he told a business function in Tauranga, adding that the current monetary policy settings aimed to stimulate the economy.

Wheeler did not specify how much lower he expected interest rates to go.

Most analysts believe they will fall to 2.5 percent by year's end, although some have tipped 2.0 percent, a prospect Wheeler appeared to throw cold water on.

"Some local commentators have predicted large declines in interest rates over coming months that could only be consistent with the economy moving into recession," he said.

Declining returns in dairy, once dubbed "white gold" by New Zealand farmers, have already begun to hit the economy, with agri-giant Fonterra announcing 523 job losses this month.