Enter Details

Comment on stories, receive email newsletters & alerts.

This is your permanent identity for Business Insider Australia
Your email must be valid for account activation
Minimum of 8 standard keyboard characters


Email newsletters but will contain a brief summary of our top stories and news alerts.

Forgotten Password

Enter Details

Back to log in


Photo by Scott Barbour/Getty Images

New Zealand is joining the monetary easing party.

It was predicted by 15 of 17 economists polled by Bloomberg, but the Reserve Bank of New Zealand (RBNZ) cut its official cash rate by 0.25% to 2.50% this morning, taking it back to the equal lowest level on record.

Amidst low inflation, falling dairy prices and a high New Zealand dollar, the cut – the third in the current easing cycle – took the total reduction in the cash rate this year to 1%.

While the decision to cut interest rates was largely expected by the markets, there were more than a few shocks to come from the accompanying monetary policy statement.

The most surprising of all came in the final paragraph with the bank watering down its easing bias, something that indicates that interest rates are likely to move lower in the period ahead.

“Monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range. We expect to achieve this at current interest rate settings, although the Bank will reduce rates if circumstances warrant,” read the RBNZ statement.

“We will continue to watch closely the emerging flow of economic data.”

The decision to lessen the easing bias – something that has put a rocket under the New Zealand dollar as bets for further rate cuts were unwound by markets – came despite the bank suggesting that the elevated level of the currency was unhelpful.

“The New Zealand dollar has risen since August, partly reversing the depreciation that occurred from April. The rise in the exchange rate is unhelpful and further depreciation would be appropriate in order to support sustainable growth,” said the RBNZ.

As the chart below reveals, the strength in the Kiwi just became a little more unhelpful.

The NZD/USD currently trades at .6690, up 0.71% for the session. Clearly the RBNZ are banking on a US interest rate hike to help weaken the Kiwi – a risky strategy given that outcome is now all but priced in by markets.

NZAD/USD 5-min chart Source:

On the back of an expected weakening in the Kiwi and diminishing effects of earlier petrol price declines, the RBNZ suggested that the inflation rate will move higher in the period ahead, forecasting that it will return to the centre of its target band of 1-3% by the end of 2016.

“CPI inflation is below the 1 to 3 percent target range, mainly due to the earlier strength in the New Zealand dollar and the 65 percent fall in world oil prices since mid-2014,” noted the bank.

“The inflation rate is expected to move inside the target range from early 2016, as earlier petrol price declines will drop out of the annual calculation, and the lower New Zealand dollar will be reflected in higher tradables prices.”

On the risks to their inflation and growth outlooks, the bank suggested that there were a “number of uncertainties”.

“In the primary sector, there are risks that dairy prices remain weak for longer, and the current El NiƱo results in drought conditions and weaker output. Risks to the domestic outlook include the prospect of net immigration staying high for longer and of household expenditure picking up on the back of strong house prices,” said the bank.

The full monetary policy statement, along with the bank’s key economic forecasts, can be accessed here.

Follow Business Insider Australia on Facebook, Twitter, and LinkedIn