The Reserve Bank of New Zealand which met earlier today cut the benchmark lending rates by 25bps from 3.0% to 2.75%. The RBNZ cut rates amid concerns of softer growth from China and the weaker activity from emerging markets and developing economies has led to a decline in global commodity prices while at the same time the US economy was showing signs of strengthening. On the domestic front, the RBNZ noted that New Zealand’s economy was still adjusting to the sharp decline in export prices and the lower exchange rate as a result and that the New Zealand’s economy was growing at an annual pace of 2.0%
While tourism, net immigration and construction activity picked, the RBNZ felt that cutting interest rates further would help support the export and import sectors. It noted that further depreciation in the New Zealand dollar was likely in order to adjust to the fall in commodity prices.
On inflation, New Zealand’s headline CPI remained below the 1.0% – 3.0% range and the Central bank noted that inflation is expected to return to normal by early 2016. The New Zealand Central bank noted that further easing to monetary policy was likely and would depend on various factors including the flow of economic data and domestic conditions. RBNZ Governor, Wheeler noted that there was more room for rate cuts, especially if there were signs of further slowdown from the Chinese economy.
The RBNZ’s interest rate forecasts was also bearish as the central bank expects to see the benchmark lending rates fall to 2.5% by 2015 while not ruling out a further rate cut to as low as 2.0%. The back to back consecutive rate cut from the RBNZ comes after the Central bank increased interest rates from 2.5% to 2.5% in 2014/2015.
The New Zealand Dollar which posted strong gains of close to 2.0% this week erased all the gains, losing over -1.6% for the day on the RBNZ’s rate cut. NZDUSD fell from the weekly highs of 0.6425 to post new weekly lows of 0.6243 before recovering from the losses. The move in the NZDUSD was in contrast to last month where after the RBNZ cut rates, the NZDUSD actually rallied. However, this wasn’t the case this time around largely due to the RBNZ’s dovish statement which is being seen as a signal for further rate cuts in next few meetings.
While the Kiwi Dollar has managed to fall close to 13% this year, the RBNZ expects to see a further decline in the New Zealand Dollar’s exchange rate as falling commodity prices and slower growth from the economy has proven to be a drag. Today’s rate cut decision comes close as a few of the economists polled expected the RBNZ to keep rates steady. The Central bank will meet next in October and December where further rate cuts could be delivered ahead of next week’s FOMC meeting where the case for and against a Fed rate hike is being closely contested.
