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Updated: NZ central bank cuts rates, signals more to come

Wednesday 8th May 2019

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The Reserve Bank cut the official cash rate by 25 basis points to a record low of 1.5 percent and signaled more cuts to come. The New Zealand dollar fell. 

"The Monetary Policy Committee decided a lower OCR is necessary to support the outlook for employment and inflation consistent with its policy remit," the newly minted committee - which includes three external members - said in the statement.

Changes to the central bank’s forecasts in the latest monetary policy statement now show a chance for another cut by March. The OCR track goes from 1.8 percent to 1.4 percent in March 2020. The bank's prior forecast in February had indicated the first move wasn't anticipated until the first half of 2021, and that that move would have been up.

In March, however, governor Adrian Orr surprised markets when he said that, given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of the next official cash rate move was down. 

In today's statement the central bank said "there is uncertainty about the global economic outlook. Trade concerns remain, while some other indicators suggest trading-partner growth is stabilising."

It also noted that "domestic growth slowed from the second half of 2018. Reduced population growth through lower net immigration, and continuing house price softness in some areas, has tempered the growth in household spending. Ongoing low business sentiment, tighter profit margins, and competition for resources has restrained investment." 

The Reserve Bank cut its forecast for GDP growth in the March quarter cut to 0.4 percent from an earlier prediction of 0.8 percent, but much of that decline is expected to be recovered during subsequent quarters

Markets had been unsure of whether or not the central bank would cut rates today as the global economy has been more positive, with both the US Federal Reserve and the Reserve Bank of Australia holding benchmark rates this week. On the flip side, headline inflation remains below the 2 percent mid-point of the central bank's target range and economic growth has been tepid. 

Market pricing had pointed to a 50 percent chance of a 25 basis-point cut to 1.5 percent today. The median estimate in a Bloomberg poll of 17 economists was for a 25 basis-point rate cut to 1.5 percent, although many said they were on the fence. 

The New Zealand dollar was trading at 65.81 US cents at 2.45pm  from 66 cents ahead of the statement. The kiwi dropped as low as 65.29 US cents.

Several banks cut their lending rates immediately after the decision, although none have said they will pass on the full 25 basis points. 

The minutes from the committee, the first to be published, said that "given the recent weaker domestic spending, and projected ongoing growth and employment headwinds, there was a need for further monetary stimulus to meet its objectives." 

New Zealand's central bank now has a dual mandate to support maximum sustainable employment and keep annual inflation between 1 percent and 3 percent over the medium term, with a focus on the mid-point of 2 percent.  

According to the statement accompanying the decision, "employment is near its maximum sustainable level. However, the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly."

"After discussing the relative benefits of holding the OCR and committing to a downward bias, versus cutting the OCR now so as to establish a more balanced outlook for interest rates, the committee reached a consensus to cut the OCR to 1.5 percent," the minutes said. 


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