NZ rate cut widely expected

The Reserve Bank of New Zealand cut its official cash rate for the fourth time this year, reducing it a quarter percentage point to 2.5 per cent, saying the economy needed a boost and inflation was low.

Market participants were also eyeing the central bank’s press conference, due shortly after the interest rate decision, for indications on the RBNZ’s future policy moves.

The New Zealand dollar, known as the kiwi, surged against the dollar after the central bank cut its key interest rate.

“The biggest central bank event on the calendar this week is the Reserve Bank of New Zealand rate decision, and it looks like it could spur a big move in the New Zealand dollar – no matter what the central bank does”, writes Christopher Vecchio, currency analyst at Daily FX.

The kiwi was lower against the Australian dollar, with AUD/NZD rising 0.25% to 1.0884.

The OCR has never been lower than 2.5 per cent, but Wheeler gave the strongest indication yet that if necessary he would drop it further if inflation failed to pick up.

Since the beginning of year, NZD has declined by more than 10% on a trade weighted basis, and the Reserve Bank of New Zealand’s inflation outlook is based on its notably weaker exchange rate.

House price inflation in Auckland remained high, posing a financial stability risk, but here were early signs that Auckland house price inflation may be moderating, it said. It edged up to 4.2587 Chinese yuan from 4.2561 yuan yesterday after government figures showed Chinese consumer prices rose 1.5 percent in November from a month earlier, beating expectations.

He also forecast that inflation would rise from 0.4 per cent now into the bank’s target range of 1.0 per cent to 3.0 per cent by early 2016.

“Residential building is accelerating, and recent tax and loan-to-value ratio measures are expected to reduce housing pressures”.

The move was widely expected by economists as the country continues to see lower inflation levels due to the strength of the New Zealand dollar.

Economic growth had slowed in 2015, the bank said, while record net migration was helping boost unemployment as job creation slowed. “Basically, the Reserve bank cut its rate but essentially what they have signalled is that that is it for them”, ANZ senior foreign exchange strategist Sam Tuck said.