New Zealand cuts interest rates to historic low

  • Business Premium
  • Wednesday, 08 May 2019

The RBNZ becomes the first central bank in the developed world to begin loosening policy this cycle, which should exert downward pressure on the New Zealand dollar and boost the inflation outlook.

WELLINGTON: New Zealand’s central bank cut interest rates to a fresh record low and signaled the chance of one further reduction amid slowing global growth and weak inflation.

“The Monetary Policy Committee decided a lower OCR is necessary to support the outlook for employment and inflation,” the Reserve Bank said after lowering the official cash rate a quarter of a percentage point to 1.5 percent. 

“A lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates.”

The RBNZ becomes the first central bank in the developed world to begin loosening policy this cycle, which should exert downward pressure on the New Zealand dollar and boost the inflation outlook. 

In late March, Governor Adrian Orr said the more likely direction of the next OCR move was down and since then economic data have been softer than expected. The inflation rate fell to 1.5 percent in the first quarter and hiring declined.

New Zealand’s dollar fell after the report. It bought 65.80 U.S. cents at 2:44 p.m. in Wellington from 66.02 cents immediately before the statement. Two-year swap rates fell 8 basis points to a record-low 1.56 percent.

The RBNZ’s projections today signal that another rate cut is possible. They show the average OCR dropping to 1.48 percent by the end of this year and 1.36 percent by the third quarter of 2020. The benchmark rate had been at 1.75 percent since November 2016.

The forecasts imply around a 50 percent probability of another cut, said Nick Tuffley, chief economist at ASB Bank in Auckland.

“The next move in the OCR will likely be data dependent; we have penciled in August but feel the risks are skewed to a later move,’’ he said. “The RBNZ’s current OCR outlook suggests a measured assessment before a further cut, rather than a sense of urgency.’’

New Committee

While 14 of 20 economists surveyed by Bloomberg expected today’s move, market pricing of a cut dropped to less than 40 percent in the hours before the announcement.

Today’s decision was the first made by an enlarged policy committee comprised of four internal and three external members plus a non-voting Treasury observer. The decision was reached by consensus, according to a record of the meeting published Wednesday.

New Zealand’s economy has cooled, with annual growth slowing to 2.3 percent last year from 3.4 percent in 2017. Subdued business confidence and renewed fears of the impact of a trade war between the U.S. and China on global growth are clouding the near-term outlook.

Forecasts Cut

The RBNZ today cut its forecasts for economic growth, saying it now expects gross domestic product to increase 2.2 percent in the year through March 2019 compared to 2.9 percent previously. It sees growth rebounding to 3.2 percent in 2020.

“Domestic growth slowed from the second half of 2018,” the RBNZ said. “Reduced population growth through lower net immigration, and continuing house price softness in some areas, has tempered the growth in household spending. Ongoing low business sentiment, tighter profit margins, and competition for resources has restrained investment.”

The central bank also increased its near-term forecasts for inflation, saying it now expects prices to rise 1.6 percent in 2019 compared to 1.4 percent previously. 

Still, inflation is not expected to reach 2 percent -- the midpoint of the central bank’s target range -- until the second quarter of 2021, which is six months later than previously projected.

“Inflationary pressure is projected to rise only slowly,” the RBNZ said, noting a more subdued outlook for employment growth. - Bloomberg

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