As expected the Reserve Bank of New Zealand cut its cash rate to 3% this morning, with more cuts on the way as the country’s economy softens in the face of a terms of trade shock from the slide in dairy export income.
The RBNZ cut its Official Cash Rate from 3.25% to 3.0%, even though Auckland remains locked in a property boom (like Sydney).
Reserve Bank Governor Graeme Wheeler said more cuts were on the cards, and a weaker dollar was needed.
"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,” Wheeler said in the statement issued this morning.
Economists have been forecasting this morning’s rate cuts since dairy prices plunged to five and six year lows and Fonterra, the country’s giant dairy exporter, slashed more than 500 jobs, with moire losses to come later in the year.
On top of that the positive impact of Christchurch rebuild (after the 2011 quake) has been slowing while low inflation has given the bank the room to cut rates to try and boost growth.
This morning’s cut follows one in June and that has sent the Kiwi dollar down by 13% against the greenback. But the RBNZ wants more to stimulate the economy and offset the massive plunge in the global price of its key export, dairy products.
Mr Wheeler said in the statement 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.
“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 (Christchurch) 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.
“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,“ Mr Wheeler said.
