RBNZ governor Graeme Wheeler cut the official cash rate a quarter-point to 2.5 percent, a level he said was low enough to spur inflation back into the target band of 1 percent to 3 percent.
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ASB economist Kim Mundy said that the case is strong for a cut tomorrow because the RBNZ can not rely on US Fed rate hikes to lower the NZD any longer and must make a move to meet its inflation target.
While the majority of industry experts aren’t expecting the BoE to make any adjustments to either interest rates or the size of asset purchases, the central bank might be encouraged to make an adjustment to its tone regarding the timeline for increasing borrowing costs.
The New Zealand dollar fell as a decline in oil prices weighed on commodity-linked currencies and as traders increased their bets for a Reserve Bank interest rate cut this week.
The monetary policy statement, announced at the same time as the official cash rate decision, will provide an insight into whether the Reserve Bank believes cuts are on the cards next year.
Globally, economic growth is below average and inflation is low, despite highly stimulatory monetary conditions.
“This doesn’t necessarily rule out further interest rate cuts when the outlook for investment and inflation is still so weak, but it does make them less likely”, said Paul Dales, chief Australia and New Zealand economist at Capital Economics.
“Rates have been very reluctant to push through this 2.5 (percent) lower bound which was indicated in the September meeting”, said Sam Tuck, senior FX strategist at ANZ Bank New Zealand in Auckland.
“Combined with the increases in the labour supply from strong net immigration, the slowdown has seen an increase in spare capacity and unemployment”, Mr Wheeler says.
The euro was down 0.4 percent at $1.0843 EUR=, while the dollar edged up about 0.1 percent to 123.32 yen JPY=.
House price inflation in Auckland remains high, posing a financial stability risk.
But the central bank also fired a warning shot at households, saying that if spending picks up on the back of rising house prices, it may force up the cost of mortgages.
Residential building is also accelerating and recent tax and loan restriction measures are expected to reduce housing pressures.
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In the primary sector, there are risks dairy prices remain weak for longer and the potential risk of an El Niño drought. “We will continue to watch closely the emerging flow of data”, the central bank said.
