RBNZ cuts rates again

By Leith van Onselen

As widely expected, the Reserve Bank of New Zealand (RBNZ) has cut the official cash rate by 0.25% to 3.00%, following up on last month’s 0.25% cut, which was the first reduction in more than four years.

According to the release accompanying the cut, RBNZ governor, Graeme Wheeler, slated the blame primarily on weakening growth and falling export (dairy) prices, which have fallen sharply and will reduce national income and slow demand:

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 appears to have peaked, and the world price for New Zealand’s dairy exports has fallen sharply.

Inflation is also well in check, although there is uncertainty over whether the depreciating Kiwi dollar will cause tradable inflation to jump:

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. Annual CPI inflation is expected to be close to the midpoint of the range in early 2016, due to recent exchange rate depreciation and as the decline in oil prices drops out of the annual figure. A key uncertainty is how quickly the exchange rate pass-through will occur.

Wheeler also noted that Auckland house prices are rising (much like Sydney’s):

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.

Wheeler also tried to jawbone for a lower Kiwi dollar, although he did drop the specific reference to being “overvalued” from last month’s 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.

And flagged further interest rate cuts:

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.

The NZD jumped almost 1% following the cut and softer language from the RBNZ.

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