New Zealand's central bank cut its benchmark Official Cash Rate (OCR) by another 25 basis points to 2.0 percent, as expected, and said its monetary policy will continue to be accommodative and "further policy easing will be required to ensure that future inflation settles near the middle of the target range."
The Reserve Bank of New Zealand (RBNZ) has now cut its rate by 50 basis points this year, following a cut in March, and by 150 points since embarking on an easing cycle in June 2015.
Nevertheless, the New Zealand dollar - known as the kiwi - rose in response to the rate cut, a move that is likely to disappoint the central bank, which was surprisingly blunt in its wish for a weaker exchange rate by saying that "a decline in the exchange rate is needed" as the high exchange rate is making it difficult to meet its inflation objective as it causes deflation in the tradable sector.
"Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate," RBNZ Governor Graeme Wheeler said in a statement.
The rate cut comes after the RBNZ in its previous policy decision in June said further easing "may" be required and then on July 20 that further easing was probably needed to lift inflation.
New Zealand's inflation rate was steady at 0.4 percent in the second quarter from the first quarter - well below the RBNZ's target of 2.0 percent, plus/minus 1 percentage point - and Wheeler said inflation was expected to weaken further in the September quarter due to low fuel prices and cuts in Accident Compensation Corporation (ACC) levies.
Inflation is seen rising in the fourth quarter due to the RBNZ's rate cuts, a strong domestic economy, a reduced drag from tradable inflation and rising non-tradable inflation, Wheeler said.
"Although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations," he added.
Supporting its expectation of further rate cuts, the RBNZ in its latest monetary policy statement forecast that the 90-day bank bill rate - indicative of OCR - would drop to 2.1 percent in December this year, then to 2.0 percent in March 2017 and 1.8 percent by June 2017 where it would remain until the end of its forecast horizon in September 2019.
This compares with its forecast from June when it expected the 90-day bill rate to fall to 2.2 percent in December this year and remain at that level in March 2017 before declining to 2.1 percent in June 2017 and remaining at that level through June 2019.
The central bank also lowered its forecast for consumer price inflation to average 1.1 percent in 2017 from June's forecast of 1.5 percent, while it retained the 2016 forecast at 0.4 percent. For 2018 inflation is now seen averaging 1.7 percent, down from 2.1 percent, and then 2.1 percent in 2019, up from the previous forecast of 1.9 percent.
The kiwi began depreciating in July 2014 and fell to a low of almost 1.60 to the U.S. dollar in September last year, a level not seen since 2009.
But since then, it has steadily firmed and was trading at 1.373 to the U.S. dollar today, up from 1.386 before the rate cut for an appreciation of 6.3 percent since the start of this year.
The Reserve Bank of New Zealand issued the following statement by its governor, Graeme Wheeler:
"The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 2.0 percent.