As expected, the Reserve Bank of New Zealand has cut interest rates.
The overnight cash rate was lowered by 25bps to 3.00%, in line with expectations.
The bank also maintained an easing bias, noting “At this point, some further easing seems likely.”
Here’s the monetary policy statement in full. Note the softer language on the level of the New Zealand dollar, something that we’ve emphasised.
“The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 3.0 percent.
Global economic growth remains moderate, with only a gradual pickup in activity forecast. Recent developments in China and Europe led to heightened uncertainty and increased financial market volatility. Particular uncertainty remains around the impact of the expected tightening in US monetary policy.
New Zealand’s economy is currently growing at an annual rate of around 2.5 percent, supported by low interest rates, construction activity, and high net immigration. However, the growth outlook is now softer than at the time of the June Statement. Rebuild activity in Canterbury appears to have peaked, and the world price for New Zealand’s dairy exports has fallen sharply.
Headline inflation is currently below the Bank’s 1 to 3 percent target range, due largely to previous strength in the New Zealand dollar and a large decline in world oil prices. Annual CPI inflation is expected to be close to the midpoint of the range in early 2016, due to recent exchange rate depreciation and as the decline in oil prices drops out of the annual figure. A key uncertainty is how quickly the exchange rate pass-through will occur.
House prices in Auckland continue to increase rapidly, but, outside Auckland, house price inflation generally remains low. Increased building activity is underway in the Auckland region, but it will take some time for the imbalances in the housing market to be corrected.
The New Zealand dollar has declined significantly since April and, along with lower interest rates, has led to an easing in monetary conditions. 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.
A reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely”.
Given expectations for further rate cuts from the RBNZ later in the year, something that largely mitigates the banks’ ongoing easing bias, perhaps the biggest surprise to come from the document is the far softer tone towards the level of the New Zealand dollar. Just compare the section that we’ve highlighted above to that seen in the RBNZ’s June monetary policy statement.
“With the fall in commodity prices and the expected weakening in demand, the exchange rate has declined from its recent peak in April, but remains overvalued. A further significant downward adjustment is justified. In light of the forecast deterioration in the current account balance, such an exchange rate adjustment is needed to put New Zealand’s net external position on a more sustainable path”.
The recent weakness in the Kiwi has certainly seen the board go softer on the need for a lower currency – something that has the exact opposite effect on the NZD/USD exchange this morning. Here’s the 5-minute tick chart. The Kiwi is currently up a tidy 0.9% at .6624.