New Zealand just cut rates

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The Reserve Bank of New Zealand has cut interest rates at its September monetary policy this morning, a move that was widely expected by the markets.

The 0.25% cut, the second in succession, took the cash rate to 2.75%, the lowest level seen since April 2014.

Here’s the full September monetary policy statement.

“The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 2.75 percent.

Global economic growth remains moderate, but the outlook has been revised down due mainly to weaker activity in the developing economies. Concerns about softer growth, particularly in China and East Asia, have led to elevated volatility in financial markets and renewed falls in commodity prices. The US economy continues to expand. Financial markets remain uncertain as to the timing and impact of an expected tightening in US monetary policy.

Domestically, the economy is adjusting to the sharp decline in export prices, and the consequent fall in the exchange rate. Activity has also slowed due to the plateauing of construction activity in Canterbury, and a weakening in business and consumer confidence. The economy is now growing at an annual rate of around 2 percent.

Several factors continue to support growth, including robust tourism, strong net immigration, the large pipeline of construction activity in Auckland and other regions, and, importantly, the lower interest rates and the depreciation of the New Zealand dollar.

While the lower exchange rate supports the export and import-competing sectors, further depreciation is appropriate, given the sharpness of the decline in New Zealand’s export commodity prices.

House prices in Auckland continue to increase rapidly and are becoming more unsustainable. Residential construction is increasing in Auckland, but it will take some time to correct the imbalances in the housing market.

Headline CPI inflation remains below the 1 to 3 percent target due to the previous strength in the New Zealand dollar and the halving of world oil prices since mid- 2014. Headline inflation is expected to return well within the target range by early 2016, as the earlier petrol price decline drops out of the annual inflation calculation, and as the exchange rate depreciation passes through into higher tradables prices. Considerable uncertainty exists around the timing and magnitude of the exchange rate pass-through.

A reduction in the OCR is warranted by the softening in the economy and the need to keep future average CPI inflation near the 2 percent target midpoint. At this stage, some further easing in the OCR seems likely. This will depend on the emerging flow of economic data”.

In terms of future monetary policy, the board noted that “at this stage, some further easing in the overnight cash rate seems likely”. This means it has maintained its easing bias, suggesting that interest rates, given current circumstances, are still likely to move lower.

On the New Zealand dollar, the board also noted that “further depreciation is appropriate, given the sharpness of the decline in New Zealand’s export commodity prices”. This suggests that despite recent falls in the Kiwi – it has dropped nearly 20% since late April – they still believe that it needs to fall further given substantial declines in dairy prices.

Alongside the policy statement, the bank also released updated forecasts for CPI, GDP and the New Zealand 90-day bank bill rate. The forecasts are found below.

The outlook for the 90-day bank bill rate was lowered for this year and next while GDP in the 12 months to March 2016 and March 2017 was slashed to 2.1% and 2.5% respectively. While its 2015 year end annual CPI forecast was revised down to 0.5% from 0.7%, that for 2016 increased fractionally from 2.1% to 2.2%.

Combined, the forecast and the statement were far more dovish than what markets had expected. This is reflected in the 5 minute NZD/USD chart below. Since the rate decision the Kiwi has plummeted close to 2%. It current sits at .6291.

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