The Reserve Bank of NZ will almost certainly cut interest rates at its next monetary policy meeting in early August, according to an economic update from the central bank this morning. And there could be more cuts to follow if inflation doesn’t pick up.
The official interest rate is currently a record low of 2%, and a cut of 0.25% would see it drop to a new low of 1.75%, with a high chance of a further cut in coming months.
The update was hastily arranged by the central bank with the timing only made known earlier this week. The news saw the Kiwi dollar fall to a six week low of 69.60 US cents.
"Monetary policy will continue to be accommodative. At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging economic data, governor Graeme Wheeler said in a statement this morning.
"Annual CPI inflation was 0.4 percent in the year to June 2016. Headline inflation is being held below the target band by continuing negative tradables inflation. Long-term inflation expectations are well-anchored at 2 percent, but short-term inflation expectations remain low.
"Despite rising capacity pressures and some recent increase in fuel prices, the stronger exchange rate implies that the outlook for inflation has weakened since the June Statement.
"Domestic growth is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy. However, low dairy prices are depressing incomes in the dairy sector and weighing on farm spending and investment.
"House price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability. The Bank is currently consulting on stronger macro-prudential measures aimed at mitigating risks to financial stability from the current boom in house prices, “ Mr Wheeler said..
The RBNZ revealed plans this week to crack down further on investor lending in particular, not only in Auckland, but across the rest of the country by forcing them to offer larger deposits and limiting home loans to a LVR maximum of 60%. First home buyers would be hit as well by another change which banned most home lending to owner occupiers ofering small deposits of up to 30%.
