Thursday 11th June 2015 |
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The Reserve Bank cut the benchmark rate a quarter point and signalled more may be on the way as the dairy sector's weak outlook weighed on the nation's terms of trade and threatened to delay an increase in inflation from its near zero level. The New Zealand dollar dropped almost a cent.
Governor Graeme Wheeler lowered the official cash rate to 3.25 percent, in a closely watched decision where markets were largely split on whether he would cut rates now or later, saying a more pronounced slump in export prices than expected and the prospect of waning consumer demand on increasing petrol prices threatened to keep a lid on already low inflation.
“The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point would be delayed,” Wheeler said in Wellington. “A reduction in the OCR is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium-term inflation converges towards the middle of the target range."
"We expect further easing may be appropriate."
The New Zealand dollar fell as low as 70.11 US cents, from 72.07 cents immediately before the decision was released at 9am. It was recently trading at 70.57 US cents.
The bank expects the country's terms of trade will be about 5 percent lower than in its March projections, primarily on the sharp decline in dairy prices, which suggested monetary policy needed to be more stimulatory to stoke inflation back into the target range of 1 percent to 3 percent annually.
Before the announcement, traders had been pricing in a 40 percent chance Wheeler would reduce the benchmark rate for the first time since the March 2011 emergency cut in response to the Canterbury earthquake.
Persistently low inflation, compounded by a strong New Zealand dollar, prompted some analysts to question why Wheeler hadn’t cut, and the view gained momentum after the Reserve Bank and government both unveiled responses to try and cool Auckland’s housing market.
Wheeler had already dropped his reference to the possibility for interest rates to rise at the April review.
The central bank lowered its track for the 90-day bank bill rate, often seen as a proxy for the OCR, seeing it fall to 3.3 percent in the December quarter of this year, and bottoming out at 3.1 percent in June 2016 where it stays over the bank's forecast horizon until June 2017. In its March forecast, it predicted the rate would stay at 3.7 percent through to March 2017, the end of the forecast horizon.
New Zealand’s consumers price index rose a 0.1 percent in the year ended March 31, after two quarters of contraction kept a lid on inflation. That’s below the central bank’s target band for inflation to be between 1 percent and 3 percent.
The central bank expects annual inflation to rise more aggressively on a weakening exchange rate and increasing petrol prices. The bank forecasts annual CPI will advance to a 1.6 percent pace by March next year, before reaching 2.1 percent in December 2016.
The trade weighted index was at an average 75.96 in the March quarter, below the Reserve Bank’s projected level of 77 in the March forecast, and the central bank sees the TWI gradually declining to 71.4 over the horizon.
Wheeler dropped his reference to the kiwi dollar being unjustifiably and unsustainably high, explicit criteria for the central bank to intervene in foreign exchange markets, saying it was still overvalued and "a further significant downward adjustment is justified."
The slow recovery in global dairy prices and peak of the Canterbury rebuild has seen some optimism over the pace of the nation’s economy taper off in recent months, and the Reserve Bank stripped out about 0.5 of a percentage point from its forecast economic growth in 2016 and 2017 March years.
BusinessDesk.co.nz
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