[WELLINGTON] New Zealand's central bank cut its benchmark cash rate for the first time in four years on Thursday and kept the door open to more easing as it expects demand to weaken, sending the New Zealand dollar tumbling to its lowest in almost five years.
The Reserve Bank of New Zealand cut its official cash rate (OCR) to 3.25 per cent in its first easing since March 2011 catching many economists off guard, and projected a further cut in coming months as economic growth and inflation pressures remain persistently weak. "A reduction in the OCR is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium term inflation converges towards the middle of the target range," RBNZ Governor Graeme Wheeler said in a statement.
Most economists polled by Reuters had expected the central bank to stay put on rates after raising them by a total of 100 basis points last year, although five out of 15 respondents had anticipated a 25 basis point cut.
Markets had priced in a 40 per cent chance of a cut and now expect roughly 44 basis points of cuts in the next 12 months.
The New Zealand dollar slumped almost two full cents versus the US dollar after the announcement, hitting a low around US$0.7015, its weakest since September 2010, before recovering to around US$0.7050.
The RBNZ cut its forecast of wholesale 90-day bank bills through mid-2017. Taken as a proxy for the OCR, the bill track indicated that short term rates will ease to 3.1 per cent by early 2017, from 3.7 per cent projected in March. "The RBNZ has again proved to be more flexible than the market gives it credit for," said Michael Turner, a strategist at RBC Capital Markets. "The main message is that it's just very hard to find upside risks to inflation right now and the bank is getting on the front foot to push it higher." Annual consumer price inflation fell to a 15-year low of 0.1 per cent in the first quarter. The RBNZ forecasts inflation will return to its 1 per cent to 3 per cent target range in the March 2016 quarter, rising to 2 per cent in the second half of next year.
Speaking to reporters, Mr Wheeler said that the New Zealand dollar remained overvalued despite an 8 per cent slide in the trade-weighted kiwi since March, adding that a further significant fall was needed to boost export proceeds. "We still believe it's got a significant way to go," he said.
A weaker currency would boost prices for dairy products, the country's biggest export earner, lifting overall growth and improving the terms of trade. It would also boost incomes in the farming sector, which has been stung by an ongoing fall in global dairy prices.
New Zealand's economy has outperformed those of other developed countries in the past few years thanks to an immigration boom, earthquake reconstruction projects, climbing global dairy prices, and a red-hot housing market in Auckland.
But with growth momentum slowing, the RBNZ in April warned that weaker demand and lower potential for wage and price rises may require a cut.
While inflation has remained low, Auckland house prices have soared to record highs. To cool the housing market, the RBNZ last month imposed mortgage restrictions on property investment in the city, which analysts said had removed a key obstacle to cutting rates.