New Zealand central bank says 'large' uncertainties to rates outlook; NZ dollar hits 6-month low

[WELLINGTON] New Zealand's central bank governor said on Wednesday that uncertainties to its interest rate projections were "large", after slashing rates to a record low and suggesting a chance of a further cut in 2020.

The uncertain factors were "large", governor Adrian Orr told reporters, after the bank cut rates to 1.5 per cent, adding it was now "in a good position to...observe the data as it unfolds".

The governor said that the US-China trade war and growing trade barriers were one of the bank's major concerns for New Zealand's small, open economy.

Meanwhile, the New Zealand dollar hit its weakest in six months on Wednesday after the central bank cut interest rates to record lows and projected a chance of even lower rates, sending bond yields to an all-time trough.

The kiwi dollar was off 0.4 per cent at US$0.6571, having initially slid three-quarters of a cent to as low as US$0.6525. It now has technical support around US$0.6515.

The Aussie dollar took a brief hit on the news but soon rallied back to US$0.7020, helped by gains against the kiwi dollar. The Reserve Bank of Australia (RBA) skipped a chance to cut its rates on Tuesday.

Trade figures out of China, a major importer of Australian resources, were mixed and had limited immediate impact on currencies. Exports declined unexpectedly but imports surprised on the high side.

The Reserve Bank of New Zealand (RBNZ) lowered rates a quarter point to 1.5 per cent after its policy meeting, saying more stimulus was needed to bolster employment and inflation.

Yet it also said the outlook for rates was now "more balanced", suggesting it was not committed to easing again. The bank's projections for rates showed only a slim chance of a further cut this year, with a greater chance in 2020.

"The RBNZ lowered its rate forecast to 1.4 per cent, thus leaving the door open to further easing but not strongly signalling it," Imre Speizer, head of NZ strategy at Westpac.

Markets had implied around a 50-50 probability of a rate cut this week so the move had a sharp impact on debt markets.

Yields on two-year paper dropped 8 basis points to an historic low of 1.34 per cent, while one-year overnight indexed swaps fell 10 basis points to 1.36 per cent.

Swap markets implied only a one-in-five chance of another easing at the next policy meeting on June 26.

The RBNZ's move was taken as slightly narrowing the odds on a cut by the RBA, with an easing by July seen as a 50-50 call. A reduction to 1.25 per cent is fully priced by September.

While the RBA did note that inflation had been surprisingly low, it again emphasised the strength of the labour market and the need to see how that fared in coming meetings.

"The RBA is clearly prepared to tolerate uncomfortably low inflation and the risks associated with this as long as the labour market remains in reasonable shape," said Su-Lin Ong, head of Australian fixed income strategy at RBC Capital Markets.

"The RBA will need to see several months of data, and the onus is clearly on some deterioration," she added. "This suggests that cuts are unlikely before August."

Australian government bond futures were firmer as safe-havens globally benefited from the risk of an escalation in the Sino-US trade dispute. The three-year bond contract added 3.5 ticks to 98.730, while the 10-year contract rose 4.5 ticks to 98.2500.

REUTERS