New Zealand cuts interest rates again, flags more to come

[WELLINGTON] New Zealand cut interest rates for the second consecutive month on Thursday, warning more easing was likely amid "softening" growth and low inflation in the farm-reliant economy.

In a widely expected move, the Reserve Bank trimmed the Official Cash Rate (OCR) 0.25 percentage points to 3.0 per cent, building on a similar decrease in June which was the first cut in New Zealand for four years.

"A reduction in the OCR is warranted by the softening in the economic outlook and low inflation," Reserve Bank governor Graeme Wheeler said in a statement.

"At this point, some further easing seem likely." Explaining the decision, Mr Wheeler said the economy was growing at a rate of about 2.5 per cent but was expected to slow.

He said the price of dairy exports, which account for about a third of New Zealand's exports, had fallen sharply.

In addition, he said construction activity from a multi-billion dollar rebuild in Christchurch after the South Island city's devastating 2011 earthquake appeared to have peaked.

The market has already factored in more cuts, with most analysts predicting the OCR will reach a record low of 2.5 per cent by year's end.

As a result, the New Zealand dollar rose 0.50 US cents to 66.15 US cents, with Westpac Bank strategist Imre Speizer saying the tone of Mr Wheeler's statement was less "dovish" than expected.

But the currency's long-term trajectory appears downward.

It has fallen from about 78 US cents since April and Mr Wheeler said "further depreciation is necessary given the weakness in export commodity prices".

Data released last week showed annual inflation was at 0.3 per cent, well below the bank's target of 1.0-3.0 per cent.

Mr Wheeler said the falling New Zealand dollar and declining oil prices should lift inflation to about 2.0 per cent early next year, although he conceded the calculation was not definite.

"A key uncertainty is how quickly the exchange rate pass-through will occur," he said.

Capital Economics analyst Paul Dales said the Reserve Bank had underestimated the hit New Zealand's economy will take from slumping dairy prices, which are currently at a 12-year low.

Mr Dales said this could slow growth to 2.0 per cent, forcing the bank to slash the OCR to a new record low.

"If we are right in believing that the Reserve Bank has yet to fully appreciate the extent of the slowdown that lies ahead, then interest rates of 2.0 per cent and a New Zealand dollar worth around 55 US cents would not be too crazy," he said.

AFP