The Reserve Bank of New Zealand (RBNZ), which has now cut its key rate by 50 basis points this year to 3.0 percent, said today's cut was warranted by the softer outlook for economic growth and low inflation, adding that further depreciation of the New Zealand dollar was "necessary given the weakness in export commodity prices."
Last month, when the RBNZ cut its rate for the first time since halting a tightening campaign in July 2014, said it expected that further easing would be appropriate, depending on new data.
Since then economic data and the New Zealand dollar, known as the kiwi, has weakened.
The kiwi has been depreciating against the U.S. dollar since hitting a high of 1.13 in July 2014.
It rose in response to today's rate cut, a likely reaction to some expectations that the Reserve Bank would cut by 50 basis points.
The kiwi was quoted at 1.505 to the U.S. dollar today from 1.521 yesterday, but was down 14.8 percent since the start of the year.
"While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices," RBNZ Governor Graeme Wheeler said in a statement.
In June 2010 the kiwi briefly fell below 1.50 to the dollar but was consistently below 1.50 between September 2008 and August 2009.
The Reserve Bank of New Zealand issued the following statement by its governor, Graeme Wheeler:
"The New Zealand dollar has declined significantly since April and, along with lower interest rates, has led to an easing in monetary conditions. While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices.
A reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely. "
"Statement by Reserve Bank Governor Graeme Wheeler:
The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 3.0 percent.
Global economic growth remains moderate, with only a gradual pickup in activity forecast. Recent developments in China and Europe led to heightened uncertainty and increased financial market volatility. Particular uncertainty remains around the impact of the expected tightening in US monetary policy.
New Zealand’s economy is currently growing at an annual rate of around 2.5 percent, supported by low interest rates, construction activity, and high net immigration. However, the growth outlook is now softer than at the time of the June Statement. Rebuild activity in Canterbury appears to have peaked, and the world price for New Zealand’s dairy exports has fallen sharply.
Headline inflation is currently below the Bank’s 1 to 3 percent target range, due largely to previous strength in the New Zealand dollar and a large decline in world oil prices. Annual CPI inflation is expected to be close to the midpoint of the range in early 2016, due to recent exchange rate depreciation and as the decline in oil prices drops out of the annual figure. A key uncertainty is how quickly the exchange rate pass-through will occur.
House prices in Auckland continue to increase rapidly, but, outside Auckland, house price inflation generally remains low. Increased building activity is underway in the Auckland region, but it will take some time for the imbalances in the housing market to be corrected.
The New Zealand dollar has declined significantly since April and, along with lower interest rates, has led to an easing in monetary conditions. While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices.
A reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely. "
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