RBNZ Cuts Rates a Second Time, Says Further Easing Is Likely

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New Zealand’s central bank cut interest rates for the second time in six weeks and said further easing will likely be needed to stoke inflation as growth slows.

Today’s move “is warranted by the softening in the economic outlook and low inflation,” Governor Graeme Wheeler said in a statement Thursday in Wellington after lowering the official cash rate a quarter percentage point to 3 percent, as forecast by 18 of 19 economists in a Bloomberg News survey. “At this point, some further easing seems likely.”

Wheeler is trying to boost inflation from near zero to his 2 percent target as plunging dairy prices curb export returns and farmer spending. Some economists predict the Reserve Bank will fully unwind last year’s four rate increases and return the benchmark to a record low of 2.5 percent.

“Given the deteriorating growth picture, weak outlook for the terms of trade and low inflation environment, a return to a 2.5 percent cash rate is justified,” said Mark Smith, senior economist at ANZ Bank New Zealand in Auckland. Still, “the use of the word ‘some’ with regard to further easing is interesting and suggests that perhaps the RBNZ will tread relatively cautiously going forward,” he said.

The kiwi dollar rose as traders pared bets on the cash rate falling as low as 2.5 percent and after Wheeler omitted a reference to the currency being overvalued. The kiwi bought 66.31 U.S. cents at 5 p.m. in Wellington, up from 65.70 cents this morning. Some traders had bet on a half-point cut today.

Inflation Outlook

Wheeler’s easing bias has helped engineer a 13 percent drop in the kiwi since the end of April, which should fan inflation by pushing up prices on imported goods.

The inflation rate was 0.3 percent in the second quarter and has been below the 2 percent midpoint of the RBNZ’s 1 percent to 3 percent target band for almost four years.

The Reserve Bank now expects inflation of “close to” 2 percent early next year, depending on how quickly the weaker exchange rate feeds through to prices, Wheeler said today. In June, it forecast an inflation rate of 1.9 percent in the third quarter of 2016.

“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,” Wheeler said. He omitted previous references to the dollar’s level being unjustified and unsustainable, a key criteria for intervention.

‘Changed Comments’

“The market may make a lot of the changed comments around the New Zealand dollar, but the key message from the RBNZ is it wants to see the currency lower,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “We continue to expect the RBNZ to cut the OCR by 25 basis points apiece in September and October to a low of 2.5 percent.”

While a weaker exchange rate may lure more tourists to New Zealand and boost export returns, the price of dairy products, the nation’s biggest export earner, has slumped to a 12-year low. Economic growth is forecast by the Bank of New Zealand and ANZ to slow to about 2 percent this year from 3.5 percent in 2014.

“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,” Wheeler said. “However, the growth outlook is now softer than at the time of the June statement,” when the RBNZ forecast expansion of 3.1 percent this year.

Rebuild activity in the earthquake-damaged city of Christchurch “appears to have peaked,” Wheeler said.

Sept. 10

The RBNZ will publish fresh forecasts with its next policy decision on Sept. 10. Wheeler said global growth remains moderate and there is “particular uncertainty” around the impact of an expected tightening in U.S. monetary policy.

The RBNZ joins counterparts in Canada and Australia in responding to falling commodity prices.

The Bank of Canada this month cut its benchmark rate for a second time this year as lower oil prices shrank the economy in the first half. The Reserve Bank of Australia has also cut rates twice in 2015 as a mining boom dwindles.

The risk is that lower borrowing costs fuel surging house prices. In Auckland, home to a third of New Zealand’s population, prices jumped 17 percent in June from a year earlier.

Wheeler said while prices in Auckland continue to increase rapidly, house-price inflation outside the country’s largest city “generally remains low.”

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