The Reserve Bank cut the Official Cash Rate by 25 basis points to 3 per cent this morning and banks quickly followed suit, cutting their own floating mortgage rates.
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The bank also maintained an easing bias, noting “At this point, some further easing seems likely”.
New Zealand’s economy is growing at an annual rate of about 2.5 percent, supported by low interest rates, building activity and high net migration, though Wheeler said the outlook has deteriorated since last month’s monetary policy statement forecasts, when it stripped out half a percentage point from expected expansion. That is because lower returns on investments mean less money from overseas will come into the country and there is less demand for our dollar.
Wheeler said while prices in Auckland continue to increase rapidly, house-price inflation outside the country’s largest city “generally remains low”.
But the New Zealand dollar advanced immediately after the rate cut, rising as much as 1.2% to 66.48 US cents.
“The currency will definitely go lower over time but it’s just that the market’s got some extremely massive speculative positions in it and the risk is that they get cleared out somewhat before we go lower again”, said Tim Kelleher, head of institutional FX sales at ASB bank in Auckland. The latest cut marks a reversal for New Zealand, which had been an outlier in a world where interest rates – including in the U.S, Japan and Europe – remain at ultra-low levels. Still, “the use of the word “some” with regard to further easing is interesting and suggests that perhaps the RBNZ will tread relatively cautiously going forward”, he said.
The RBNZ isn’t alone in its response to the wider slump in commodity prices.
“The recent drop in iron ore prices and the economic calamity that resulted in Australia should serve as a warning to our government of the outcome the dairy price collapse will have in New Zealand”.
The kiwi dollar climbed to a peak of $0.6654, from $0.6570 before the central bank rate policy decision, and was last up 0.8 percent on the day at $0.6628, moving away from a six-year low of $0.6498 plumbed on July 14.
“While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices”, Wheeler said.
In Auckland, home to a third of New Zealand’s population, prices jumped 17 percent in June from a year earlier.
The New Zealand dollar rallied after the Reserve Bank cut its official cash rate because language around the statement was less pessimistic than the market was expecting.
Economists predicted that three of nine members of the BoE’s Monetary Policy Committee might vote for a rate hike in August, which could put the central on track for a majority to back an increase later this year or in early 2016.
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In a statement, Wheeler said headline inflation was below the bank’s 1-3 per cent target.
