New Zealand's central bank left its benchmark Official Cash Rate (OCR) unchanged at 3.5 percent, as widely expected, but raised the possibility of a rate cut by saying that any changes in the policy rate would depend on inflationary pressures and "it would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target."
The Reserve Bank of New Zealand (RBNZ), which raised its rate by 100 basis points in 2014 before switching to a neutral bias in January and March, ruled out any near-term rate rises by saying it "expects to keep monetary policy stimulatory, and is not currently considering any increase in interest rates."
The policy statement echoes a speech by RBNZ Assistant Governor John McDermott on April 22 when he said the outlook for inflation was subdued, suggesting that monetary policy should remain stimulatory for a prolonged period and any weakening of demand and inflationary pressures would prompt the bank to consider lowering rates.
The RBNZ's mention of a possible rate cut compares with its statement from last month when it said any future rate changes could be up or down, depending on the flow of data.
Although New Zealand's economy continues to grow at a rate of 3 percent, the RBNZ is clearly concerned about the outlook, saying lower dairy incomes, the lingering effects of drought, fiscal consolidation and the high exchange rate were "weighing on the outlook for growth."
In March the central bank described the country's economy as "strong" even as it also pointed to the same factors as weighing on growth.
The RBNZ voiced its displeasure with the recent rise in the New Zealand dollar's exchange rate, saying this appreciation was "unwelcome" and repeated its recent view that it remains "unjustifiably high and unsustainable."
After depreciating from July 2014 to February this year, the New Zealand dollar, known as the kiwi, has reversed course and strengthened, putting further downward pressure on inflation by lowering import prices.
The kiwi was trading at 1.31 to the U.S. dollar today, up from 1.379 on Jan. 31 but still below 1.28 at the start of the year.
Consumer price inflation plunged to 0.1 percent in the first quarter of this year from 0.8 percent in the fourth quarter, well below the RBNZ's target of 2.0 percent, plus/minus 1 percentage point.
The Reserve Bank of New Zealand issued the following statement by its governor, Graeme Wheeler: