New Zealand has surprised by cutting its key interest rate, joining Australia in easing monetary policy as demand slows because of falling commodity prices and weak inflation.
News of the cut came this morning after the Reserve Bank of New Zealand’s latest monetary policy meeting concluded that a rate cut was now needed to support the economy ahead of the start of an expected slowdown.
And the central bank left the market in no doubt that more rate cuts lie ahead after the 0.25% cut in the official cash rate to 3.25%. The cut reverses one of the four rate rises in 2014.
The cut came despite worries about the huge property boom in Auckland, although the RBNZ and national government have tackled that by introducing macroprudential controls on investor home lending and tightened the tax laws.
“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," the RBNZ statement said.
"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,” the RBNZ’s statement concluded.
