New Zealand's central bank cut its benchmark Official Cash Rate (OCR) by 25 basis points to 3.25 percent, as expected by around 50 percent of economists, and said it expects to cut rates further, with new data determining the timing of its next move.
It is the first change in policy rates by The Reserve Bank of New Zealand (RBNZ) since July 2014 when the central bank called a halt to its tightening campaign after four rate hikes. The tightening was in response to rising inflationary pressures and the RBNZ became the first central bank among the advanced economies to raise rates since July 2011.
The RBNZ already warned in April that it could cut rates if demand weakened further and many economists became convinced that a rate cut was coming this month after a larger-than-expected fall in New Zealand's first quarter inflation rate and last month's move by the government to stem the rise in Auckland house prices by more effective taxation on capital gains on investment properties and an initiative to ensure that non-residents pay their tax.
Although New Zealand's economy is expanding at a rate of around 3 percent, RBNZ Governor Graeme Wheeler said the impact of lower commodity prices is becoming more pronounced and the prospect of weak dairy prices and the recent rise in petrol prices will slow income and demand, increasing the risk that inflation will remain below the bank's midpoint target of 2.0 percent.
Reflecting lower commodity prices and an expected weakening of demand, Wheeler said the exchange rate of the New Zealand dollar, known as the kiwi, had declined from its recent peak in April, but remains overvalued and repeated that "a further significant downward adjustment is justified."
New Zealand's consumer price inflation rate tumbled to 0.1 percent in the first quarter of 2015 from 0.8 percent in the fourth quarter of 2014 and the weakest reading since the third quarter of 1999.
The kiwi fell immediately after the inflation number was released as traders saw this strengthening the arguments for a rate cut. The kiwi fell over 8 percent to 1.42 against the U.S. dollar on June 6 from 1.30 the day before the inflation figure was announced.
In the last couple of days, the kiwi rebounded to trade at 1.39 to the dollar, but immediately fell almost 1.5 percent following the rate cut to 1.41, down 9.2 percent since the start of the year.
New Zealand's Gross Domestic Product expanded by 0.8 percent
in the fourth quarter of 2014 from the previous quarter for annual growth of
3.5 percent, up from 3.2 percent in the third quarter, and the strongest
quarterly growth rate since the fourth quarter of 2008.
The Reserve Bank of New Zealand (RBNZ) issued the following statement:
We expect further easing may be appropriate. This will depend on the emerging data."