New Zealand cuts rate 25 bps, expects further easing

    New Zealand's central bank cut its benchmark Official Cash Rate (OCR) by 25 basis points to 3.25 percent, as expected by around 50 percent of economists, and said it expects to cut rates further, with new data determining the timing of its next move.
    It is the first change in policy rates by The Reserve Bank of New Zealand (RBNZ) since July 2014 when the central bank called a halt to its tightening campaign after four rate hikes. The tightening was in response to rising inflationary pressures and the RBNZ became the first central bank among the advanced economies to raise rates since July 2011.
    The RBNZ already warned in April that it could cut rates if demand weakened further and many  economists became convinced that a rate cut was coming this month after a larger-than-expected fall in New Zealand's first quarter inflation rate and last month's move by the government to stem the rise in Auckland house prices by more effective taxation on capital gains on investment properties and an initiative to ensure that non-residents pay their tax.
    Although New Zealand's economy is expanding at a rate of around 3 percent, RBNZ Governor Graeme Wheeler said the impact of lower commodity prices is becoming more pronounced and the prospect of weak dairy prices and the recent rise in petrol prices will slow income and demand, increasing the risk that inflation will remain below the bank's midpoint target of 2.0 percent.
    Reflecting lower commodity prices and an expected weakening of demand, Wheeler said the exchange rate of the New Zealand dollar, known as the kiwi, had declined from its recent peak in April, but remains overvalued and repeated that "a further significant downward adjustment is justified."
    New Zealand's consumer price inflation rate tumbled to 0.1 percent in the first quarter of 2015 from 0.8 percent in the fourth quarter of 2014 and the weakest reading since the third quarter of 1999.
    The kiwi fell immediately after the inflation number was released as traders saw this strengthening the arguments for a rate cut. The kiwi fell over 8 percent to 1.42 against the U.S. dollar on June 6 from 1.30 the day before the inflation figure was announced.
    In the last couple of days, the kiwi rebounded to trade at 1.39 to the dollar, but immediately fell almost 1.5 percent following the rate cut to 1.41, down 9.2 percent since the start of the year.
    New Zealand's Gross Domestic Product expanded by 0.8 percent in the fourth quarter of 2014 from the previous quarter for annual growth of 3.5 percent, up from 3.2 percent in the third quarter, and the strongest quarterly growth rate since the fourth quarter of 2008.


    The Reserve Bank of New Zealand (RBNZ) issued the following statement:

"Statement by Reserve Bank Governor Graeme Wheeler:

The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 3.25 percent.

Growth in the global economy remains moderate. Data on economic activity in the US, China and Australia has been mixed, although there has been some improvement in the euro area and Japan. Volatility in financial markets has increased. 

The New Zealand economy is growing at an annual rate around three percent, supported by low interest rates, high net migration and construction activity, and the decline in fuel prices. However, the fall in export commodity prices that began in mid-2014 is proving more pronounced. The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point would be delayed. 

Inflation has been low due to falling import prices and the strong growth in the economy’s supply potential. Wage inflation and inflation expectations have been subdued. 

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.

House prices in Auckland continue to increase rapidly, and increased supply is needed to address this. The proposed LVR measures and the Government’s tax initiatives planned for 1 October 2015 should ease the impact of investor activity.

A reduction in the OCR is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium term inflation converges towards the middle of the target range. 

We expect further easing may be appropriate. This will depend on the emerging data."

    www.CentralBankNews.info