As widely expected, the Reserve Bank of New Zealand (RBNZ) has cut the official cash rate by 0.25% to 2.50%, the first rate cut since September.
According to the release accompanying the cut, RBNZ governor, Graeme Wheeler, slated the cause primarily on weakening growth (both foreign and domestic), excess capacity, and weak export (dairy) prices, which will reduce national income and slow demand. He also raised concern that the NZD has begun to reflate, and hopes the cut in interest rates will place downward pressure on the currency:
Globally, economic growth is below average and inflation is low, despite highly stimulatory monetary conditions. Financial markets remain concerned about weaker growth in emerging economies, particularly in China. Markets are also focused on the expected tightening of policy in the United States and the prospect of an increasing divergence between monetary policies in the major economies.
Growth in the New Zealand economy has softened over 2015, due mainly to lower terms of trade. Combined with increases in the labour supply from strong net immigration, the slowdown has seen an increase in spare capacity and unemployment. A recovery in export prices, the recent lift in confidence, and increasing domestic demand from the rising population are expected to see growth strengthen over the coming year.
The New Zealand dollar has risen since August, partly reversing the depreciation that occurred from April. The rise in the exchange rate is unhelpful and further depreciation would be appropriate in order to support sustainable growth.
However, Wheeler remains concerned by Auckland’s housing bubble; although it does look to be cooling:
House price inflation in Auckland remains high, posing a financial stability risk. Residential building is accelerating, and recent tax and LVR measures are expected to reduce housing pressures. There are some early signs that Auckland house price inflation may be moderating.
And Wheeler noted that rates would likely remain where they are for the foreseeable future:
Monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range. We expect to achieve this at current interest rate settings, although the Bank will reduce rates if circumstances warrant. We will continue to watch closely the emerging flow of economic data.
He also noted several risks to the outlook:
Risks to the domestic outlook include the prospect of net immigration staying high for longer and of household expenditure picking up on the back of strong house prices.
The New Zealand dollar rose by half a cent following the rate cut and guidance that rates would likely remain on hold.
