As widely expected, the Reserve Bank of New Zealand (RBNZ) has cut the official cash rate by 0.25% to 2.75%, which follows July’s 0.25% cut.
According to the release accompanying the cut, RBNZ governor, Graeme Wheeler, slated the blame primarily on weakening growth (both foreign and domestic) and falling export (dairy) prices, which have fallen sharply and will reduce national income and slow demand:
Concerns about softer growth, particularly in China and East Asia, have led to elevated volatility in financial markets and renewed falls in commodity prices…
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…
Wheeler also continued to talk down 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.
And advised that rates would likely fall further:
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.
However, Wheeler remains concerned by Auckland’s housing bubble, which he described as “unsustainable” (much like Sydney’s):
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.
The New Zealand dollar fell by more than once cent following the cut and dovish guidance from the RBNZ:
