The Reserve Bank of New Zealand stunned financial markets earlier today, cutting its overnight cash rate by 0.25% to 2.25%.
The decision, correctly predicted by only 4 of 21 economists polled by Thomson Reuters, left the cash rate at the lowest level on record.
In the accompanying monetary policy statement released by RBNZ governor Graeme Wheeler, the bank laid the groundwork for further interest rate cuts, noting that “further policy easing may be required to ensure that future average inflation settles near the middle of the target range”.
That’s a clear easing bias from the bank, indicating that risks to further adjustments to the cash rate remain firmly to the downside.
Bolstering this view, as shown in the table below from the RBNZ, the bank is now forecasting that the 90-day bank bill rate will fall to 2.1% by mid-2017, down significantly on the 2.6% level it saw in December last year.
After the 0.25% rate cut today, it suggests the RBNZ is potentially looking at one further 0.25% reduction in the period ahead.
As you would expect given the unexpected decision to cut rates and retain a clear easing bias, the commentary throughout the statement was incredibly dovish.
“The outlook for global growth has deteriorated since the December Monetary Policy Statement, due to weaker growth in China and other emerging markets, and slower growth in Europe,” said the RBNZ. “This is despite extraordinary monetary accommodation, and further declines in interest rates in several countries. Financial market volatility has increased, reflected in higher credit spreads. Commodity prices remain low.”
And here’s the bank’s commentary on the inflation outlook, something that clearly contributed to its decision to cut rates.
“While long-run inflation expectations are well-anchored at 2 percent, there has been a material decline in a range of inflation expectations measures. This is a concern because it increases the risk that the decline in expectations becomes self-fulfilling and subdues future inflation outcomes.”
The bank also took aim at the elevated level of the New Zealand dollar, noting “the trade-weighted exchange rate is more than 4 percent higher than projected in December, and a decline would be appropriate given the weakness in export prices”.
It also sees a plethora of risks moving forward, both emanating from within New Zealand and externally.
“Internationally, these are to the downside and relate to the prospects for global growth, particularly around China, and the outlook for global financial markets,” said the RBNZ. “The main domestic risks relate to weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.”
In combination, the rate cut, clear easing bias and dovish policy statement has had an immediate impact on the New Zealand dollar: it’s been hammered.
Here’s a 5-minute NZD/USD chart. The Kiwi is currently off more than 1.3% for the session.
The RBNZ’s full monetary policy statement can be accessed here.
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