Economy facing plenty of issues but NZ’s prospects for growth are good, says governor.

Despite cutting interest rates three times this year Reserve Bank governor Graeme Wheeler says he remains optimistic about the New Zealand economy.

He's looking relaxed, if perhaps a little tired, in the bank's Queen St office the morning after one of the most highly scrutinised monetary policy statements of the year.

The dollar has dipped, banks have cut mortgage rates and the economists have crunched the numbers, dissected the words. New Zealand is braced for what the bank has called a "softening" of the economy.

Just how worried should we be?

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"If you say, has the economy performed well in recent years, then the answer is yes. It has been one of the best-performing economies in the developed world," Wheeler says.

"Do we feel that the prospects for growth are good? Yes we do."

But before we get to those upbeat prospects, let's look at why rates are falling.

As the governor lists the issues we're facing - punctuated at an eye-watering rate with statistics and data from all corners of the world - you'd be forgiven for thinking it is all doom and gloom.

There's the dairy slump of course.

"If you look at the past 18 months and you take a basket of our commodities, not just dairy, the price fall has been 25 per cent and that's a very significant correction in export prices and that's going to slow any economy," says Wheeler.

"Also the work in Canterbury is plateauing and we think it has peaked by now. And you've seen business and consumer confidence fall.

"And all of this takes place against a backdrop of much greater uncertainty around China."

The bank doesn't believe we are facing a recession but there are risks.

"You would really have to see China get into substantial trouble or a very bad weather event like an El Nino that went deep into next year."

The weight of negative data over the past 12 months has critics accusing the bank of getting it wrong when it raised rates twice last year.

If that bothers Wheeler, then it doesn't show. He is very open to discussing the fact the bank didn't foresee oil and other commodity prices, including dairy, slumping as far as they did last year.

But he is sceptical of those who expect central banks to predict the future. "Someone will always say, 'Yes, I told you so'. But I don't think any central bank predicted that oil prices would fall 60 per cent."

The bank makes projections but they are always conditional, he says.

The line in this week's statement - "At this stage, some further easing in the OCR seems likely" - has been interpreted by markets as a certain rate cut in October.

"At this stage we believe that, but there are three qualifiers in the sentence," Wheeler points out. "We spend a lot of time on the statement."

The central issue for many of the critics of the bank's policy has been its attitude to inflation - or rather, the lack of it. Wheeler is well aware of the arguments - it is a debate raging among top economists around the world. Is inflation dead? Has there been a structural shift in the world so profound that central banks need to stop worrying about it?

"I don't accept that," he says. "I don't think that is the case."

In New Zealand inflation has slipped well below the Reserve Bank targeted mid-point of 2 per cent.

But Wheeler and his team believe we will see inflation pick up next year. Just by virtue of the commodity slump working its way through the data flow, it should be back around 1.5 per cent by March, he says.

"We think we'll see tradeable inflation pick up from negative to positive," he says. "I don't think you can have a 16 per cent reduction in the TWI [trade weighted index] or 30 per cent cross rate adjustment with the US and not see it passed through into tradeable prices. We think it will be back to around the mid-point by the middle of next year." In other words the bank believes the falling dollar will eventually flow through to higher prices for imported goods.

But that said, Wheeler accepts that the need for central banks to focus on price stability has eased for now and he is engaged by the debate.

"It is an interesting question, to what extent there are structural changes in inflation ... to what extent have retail margins been cut back in a structural sense by the internet or to what extent is wage moderation occurring ... because people are worried about job security and changes in employment because of technology, those things could be quite significant.

"It is something every central bank thinks quite deeply about."

Wheeler is keen to make the point that the bank is anything but robotic with its primary focus on inflation.

Critics, particularly on the political left, have called for the bank to broaden its outlook.

"Some people say ... we don't care about growth. But I think every central bank thinks quite deeply about how the economy is going, what's happening to demand, to investment, to unemployment."

So how is it all looking? Where are those grounds for optimism?

Economics isn't called the dismal science for nothing, Wheeler notes. "We have to be careful."

Reserve Bank forecasts still show growth going from 2 per cent to 2.5 to 3 per cent.

"There's still a large pipeline of construction activity, commercial investment in Auckland is continuing and spreading elsewhere, residential permits are at a 10-year high.

"You've also got migration which continues to surprise everyone and has been much higher than everyone, including ourselves, forecast

"You've got labour force participation at record highs and then we've seen quite an easing of monetary policy and the exchange rate."

He adds that tourism is doing well, beef and wool prices have stayed strong even as dairy has slumped and the past two global dairy auctions have been positive.

We're going through a patch where growth is softening but there are many positive things still driving growth in this economy and we're quite optimistic about those. [New Zealand] is a very attractive place to live. So I think the prospects are good. We do have issues we have to solve that are serious: social issues around housing and housing affordability in Auckland that have implications for future generations and whether they can afford housing. We have issues around 'what if' China really does slow dramatically, 'what if' we did get a serious drought. We just have to be open minded ... watch the data and be alert to those things.