He said weak global conditions and low worldwide interest rates were placing upward pressure on the New Zealand dollar.
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The currency has climbed since Wheeler last cut rates in March as he grew wary of stoking the property boom with even lower borrowing costs.
Wheeler indicated more easing was likely and said the strength of the currency was making it hard to meet his 1-to-3 per cent inflation target band. Together with low global inflation, Mr. Wheeler said this was causing negative inflation in the tradables sector.
The Australian dollar gained after its central bank cut rates.
It is at nearly the same levels as past year, as shown in the chart below. “A decline in the exchange rate is needed”, the RBNZ said in this morning’s statement.
The New Zealand dollar was the best performer from the majors against the greenback on Wednesday and was trading 1.2% stronger during the London session, seen around $0.7250 and jumping beyond all resistances.
The NZD to AUDF exchange rate converts at 0 today.
The banks can deny the benefit to floating mortgage rate borrowers. Foreign exchange brokers can save up to 5% on worldwide payments in comparison to the banks.
“Most banks are calling for another one or two cuts out of New Zealand over the course of 2016, but I don’t think it’s going to do too much to drive the currency lower unless they do come out and do 50 in one hit”.
The kiwi climbed 1.1 per cent to 72.84 U.S. cents as of 10:30 am in Singapore, after jumping as much as 1.9 per cent to 743.41 after the RBNZ announcement. “We will continue to watch closely the emerging economic data”.
Despite a New Zealand rate cut, it is unlikely that the banks will pass the benefit to all customers.
Governor Wheeler will have to issue a strong statement hinting at “further easing may be required”. “The key will be guidance”, reports Bloomberg. The RBNZ lowered its prime lending rate by 25bps as expected.
House price inflation was adding to concerns about financial stability as it spread beyond the largest city of Auckland – home to a third of the population – and into surrounding regions.
However ANZ, Westpac and ASB all responded by passing just 5-10 of the 25 basis point cut in the benchmark rate, while also announcing marked increase in short term deposit rates for savers, of up to 0.5 percentage points.
“The risks around this meeting are therefore likely tilted toward the RBNZ not sounding sufficiently dovish relative to these expectations”, Bank of New Zealand senior market strategist Kymberly Martin said in note. The AUD/NZD cross fell 0.9 percent after the RBNZ cut.
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Only one more cut is what has “disappointed” markets as the RBNZ like the RBA is caught between a rock and a hard place with housing bubbles and the worldwide interest rate war overriding effective monetary policy.
