The Reserve Bank of New Zealand (RBNZ) cut interest rates to a record-low level on Thursday, a decision widely expected by economists and financial markets alike.
The bank reduced its overnight cash rate by 25 basis points to 1.75%, largely as a result of persistently weak inflationary pressures.
“Headline inflation continues to be held below the target range by ongoing negative tradables inflation,” the RBNZ said in its accompanying monetary policy statement.
That, it said, was partly due to strength in the New Zealand dollar, suggesting that a “decline in the exchange rate is needed”.
“Weak global conditions and low interest rates relative to New Zealand are keeping upward pressure on the New Zealand dollar exchange rate,” said the RBNZ.
“The exchange rate remains higher than is sustainable for balanced economic growth and, together with low global inflation, continues to generate negative inflation in the tradables sector.”
On the nation’s hot housing market, something that many believe has prevented the bank from cutting interest rates even further, it said that while price growth has moderated in Auckland, “it is uncertain whether this will be sustained given the continuing imbalance between supply and demand”.
It also said that “house price inflation remains excessive and is posing concerns for financial stability”.
With the RBNZ forecasting that “annual inflation is expected to rise from the December quarter”, it provided no definitive signal that it intends to reduce interest rates further, simply stating that “monetary policy will continue to be accommodative”.
“Our current projections and assumptions indicate that policy settings, including today’s easing, will see growth strong enough to have inflation settle near the middle of the target range,” it said.
“Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”
Perhaps appropriately given the events of the past 24 hours, it also noted that “political uncertainty remains heightened and market volatility is elevated”.
Here’s the bank’s key forecasts for GDP, CPI, the New Zealand dollar trade-weighted index and interest rates.
The overnight cash rate is projected to sit at 1.7% throughout the forecast period, implying a small chance that interest rates could be reduced further in the years ahead, at least according to the bank.
Inflation is also tipped to move back towards the midpoint of the RBNZ’s 1-3% target band while the New Zealand dollar is expected to weaken, albeit modestly.
The absence of an implicit easing bias from the RBNZ, indicating that rates are likely to move lower in the period ahead, along with forecasts offered by the bank, suggests that it now sees interest rates on hold for the foreseeable future.
This has helped the New Zealand dollar recover in recent trade, rising to as high as .7360 having hit a low of .7260 earlier in the session.
The NZD/USD currently buys .7350.