Kiwi jumps as New Zealand rate cut disappoints

Today’s 25 basis point cut in the Official Cash rate to a new record of 2 percent is a case of worries about the high dollar and inflation outweighing the risks of a souring housing market.

“With the focus firmly on inflation expectations, we are adding a further 50 basis points of easing into our forecasts”, said Michael Turner, a strategist at RBC Capital Markets.

According to the central bank, long-term inflation expectations are well-anchored at 2%, but sustained weakness in the headline inflation rate risks a further decline in inflation expectations and this was a significant change in rhetoric from the previous statement.

The Reserve Bank of New Zealand (RBNZ) rate cut to record lows had no effect in weakening the exchange rate with the currency actually gaining ground.

“Inflation expectations are a very slow-moving beast, but once they’ve gone too far down we would have a tremendously hard job fixing them”, said McDermott.

Mr Bagrie says the decision to cut the cash rate wasn’t a surprise, but the market reaction was.

The New Zealand dollar rose to $0.7351, its highest since May 2015, before settling back to $0.7253, up 0.82 percent on the day.

U.S. export and import prices It’s easing but the latest import price data shows that the America is still not importing inflation. But we also appreciate the RBNZ’s predicament and the challenge presented by the actions of other central banks forcing global yields lower.

Thursday’s quarter point cut from the Reserve Bank of New Zealand (RBNZ) looked like weak beer compared with the recent drastic easing from the Bank of England. So, markets wondered how big of a cut Wheeler would deliver.

The cut did nothing for the stubbornly high New Zealand dollar and it’s those trying to live off interest on savings who are feeling the squeeze.

The yield will fall from 2.1 per cent next quarter to 1.8 per cent by the second quarter of 2017, the bank projected.

“The Reserve Bank expects inflation to rise to 1% by the end of this year – just within the 1-3% target range”. He also said that in a “normal” situation, the central bank would probably be raising rates to cool the rampant housing market.

“If the NZ dollar doesn’t head down the Reserve Bank will have to keep going with interest rates in a bid to meet its inflation target”.

July’s house price balance report from RICS revealed that house prices had come in at 5%, worse than the expected 6%. “High net immigration is supporting strong growth in labour supply and limiting wage pressure”.

However, Wheeler’s earlier observation that, ‘house price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability, ‘ raised speculation from analysts that these further policy loosening measures might not include decreases in the domestic cost of borrowing.