As expected the Reserve Bank of NZ has again eased monetary policy by trimming its official cash rate 0.25% to 2.75%, the third successive cut by the bank this year.
The decision was announced in a statement issued just after 7am Sydney time. The Kiwi central bank also left the way open for another reduction in the near future. Some analysts say it will come by the end of the year and possibly at the next meeting of the bank in late October.
And the bank’s statement again pointed to the need for the Kiwi dollar to continue its recent decline to help offset the drop in commodity prices (a situation similar to the one Australia is in).
The statement though made it clear the cut in rates was being amde despite the continuing housing bubble in Auckland which was described as “becoming more unsustainable”.
"A reduction in the OCR is warranted by the softening in the economy and the need to keep future average CPI inflation near the 2 percent target midpoint. At this stage, some further easing in the OCR seems likely. This will depend on the emerging flow of economic data,” the RBNZ statement read.
The central bank made clear the cut, like the two previous reductions were driven by a combination of weaker international growth (especially in China and the rest of Asia), falling commodity prices (especially for dairy products) and weakening domestic activity.
"Domestically, the economy is adjusting to the sharp decline in export prices, and the consequent fall in the exchange rate. Activity has also slowed due to the plateauing of construction activity in Canterbury, and a weakening in business and consumer confidence. The economy is now growing at an annual rate of around 2 percent,” the statement read.
"Several factors continue to support growth, including robust tourism, strong net immigration, the large pipeline of construction activity in Auckland and other regions, and, importantly, the lower interest rates and the depreciation of the New Zealand dollar.
"While the lower exchange rate supports the export and import-competing sectors, further depreciation is appropriate, given the sharpness of the decline in New Zealand’s export commodity prices.
"House prices in Auckland continue to increase rapidly and are becoming more unsustainable. Residential construction is increasing in Auckland, but it will take some time to correct the imbalances in the housing market.
“Headline CPI inflation remains below the 1 to 3 percent target due to the previous strength in the New Zealand dollar and the halving of world oil prices since mid- 2014.
"Headline inflation is expected to return well within the target range by early 2016, as the earlier petrol price decline drops out of the annual inflation calculation, and as the exchange rate depreciation passes through into higher tradables prices. Considerable uncertainty exists around the timing and magnitude of the exchange rate pass-through,” the statement added.
