RBNZ cuts cash rate by quarter point to 2.5pc

Homeowners may feel relief after the Reserve Bank cut its official cash rate by 25 basis points to a record low of 2.5 per cent.

‘Globally, economic growth is below average and inflation is low, despite highly stimulatory monetary conditions, ‘ says RBNZ Governor Graeme Wheeler. Wheeler also said policy makers expect to achieve their goals at current interest-rate settings, although they are ready to reduce rates again if needed.

Driving this cut – the fourth this year – is the persistently low inflation that New Zealand has been experiencing for the last couple of years. “The rise in the exchange rate is unhelpful and further depreciation would be appropriate in order to support sustainable growth”, the RBNZ said in a statement.

“Although the economy is growing at about a two and a half percent pace, pre-GFC at that rate of growth, we would have inflation probably comfortably within the one to three percent target range”.

Against the Australian and the U.S. dollars, the kiwi edged down to 1.0899 and 0.6622 from an early near 4-week high of 1.0839 and a 2-day high of 0.6659, respectively.

The bank embarked on a loosening of policy in response to a slump in global dairy prices, which weigh on national incomes as the country’s biggest export commodity. It really comes down to risk appetite, as the more there is of it, the more purchasing of the New Zealand dollar we see.

While further OCR cuts look unlikely, there aren’t likely to be any increases soon.

Economists at Westpac and ASB are forecasting that Wheeler will drop the OCR to 2 per cent in late 2016, while BNZ and ANZ have said 2.5 per cent would be the low point in the current cycle.

The central bank expects gross domestic product will expand at a faster pace next year, with greater activity in 2017 as residential property investment exceeds earlier predictions.

However inflation has been below 1 per cent this year and is now 0.4 percent.

He noted house price inflation in Auckland remained high, “posing a financial stability risk”.

The RBNZ says that inflation is below the target range mainly due to the earlier strength of the New Zealand dollar, and the 65% fall in world oil prices since mid-2014.