The Reserve Bank of New Zealand (RBNZ) has now cut its rate by 75 basis points this year and by 175 points since embarking on an easing cycle in June 2015.
RBNZ Governor Graeme Wheeler said monetary policy would continue to remain accommodative but the bank expects economic growth to be strong enough for inflation to settle near the middle of its target range.
"Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly," Wheeler said.
In contrast Wheeler said in September, when the RBNZ left its rate unchanged, that "further policy easing will be required to ensure that future inflation settles near the middle of the target range."
New Zealand's inflation rate was steady at 0.4 percent in the third quarter of this year, recently revised from an initial 0.2 percent due to a processing error, well below the bank's target of 2.0 percent, plus/minus 1 percentage point.
But the RBNZ expects inflation to start to rise from the fourth quarter, reflecting its easy policy stance, accelerating economic activity and reduced drag from inflation linked to trade.
As in the previous policy statement from September, Wheeler said the exchange rate of the New Zealand dollar - known as the kiwi - remains too high and puts pressure on the country's exporters and continues to generate negative inflation through imports.
"A decline in the exchange rate is needed," Wheeler said, repeating his plea from September.
The kiwi began depreciating in July 2014 and fell to a low of almost 1.60 to the U.S. dollar in September last year, a level not seen since 2009.
But since then, it has appreciated firmed and was trading at 1.38 to the U.S. dollar today for a rise of 5.8 percent since the start of this year, pushed up by low global interest rates that is keeping upward pressure the exchange rate.
The Reserve Bank of New Zealand issued the following statement by Governor Graeme Wheeler:
"The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 1.75 percent.
Significant surplus capacity exists across the global economy despite improved economic indicators in some countries. Global inflation remains weak even though commodity prices have come off their lows. Political uncertainty remains heightened and market volatility is elevated.
Weak global conditions and low interest rates relative to New Zealand are keeping upward pressure on the New Zealand dollar exchange rate. 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. A decline in the exchange rate is needed.
Domestic growth is being supported by strong population growth, construction activity, tourism, and accommodative monetary policy. Recent dairy auctions have been positive, but uncertainty remains around future outcomes. High net immigration is supporting growth in labour supply and limiting wage pressure.
House price inflation remains excessive and is posing concerns for financial stability. Although house price inflation has moderated in Auckland, it is uncertain whether this will be sustained given the continuing imbalance between supply and demand.
Headline inflation continues to be held below the target range by ongoing negative tradables inflation. Annual CPI inflation was weak in the September quarter, in part due to lower fuel prices and cuts in ACC levies. Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, and reduced drag from tradables inflation.
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. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."
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