The Reserve Bank of New Zealand has cut the official cash rate 25 basis points from 3.25 per cent to three per cent and has indicated further cuts are on the way.
“NZ’s economy is currently growing at an annual rate of around 2.5 per cent, supported by low interest rates, construction activity, and high net immigration,” Reserve Bank governor, Graeme Wheeler, said.
Further cuts are contingent on how far businesses can pass on the cost of higher imports, which is exacerbated by a softer outlook. The recent NZ Institute of Economic Research quarterly survey of business opinion revealed retailers have not been able to pass on recent falls.
According to Westpac chief economist, Dominick Stephens, Wheeler is clearly signalling deeper OCR cuts than the three per cent low point advised in the June monetary policy statement.
Stephens said the RBNZ’s policy guidance is now rather blunt as manifest in “At this point, some further easing seems likely”.
“This is a clear signal for another cut in September,” said Stephens.
“This is stronger guidance than June’s guidance of ‘We expect further easing may be appropriate. This will depend on the data’.”
The RBNZ stated that the “growth outlook is now softer than at the time of the June statement as a consequence of the Christchurch rebuild having peaked and global dairy prices falling sharply”.
“This matches our own assessment of the economic outlook,” said Stephens.
But the RBNZ also pointed out that the plunging exchange rate will cause inflation to rise back to two per cent in early-2016. “Again, we concur. The RBNZ generally softened its rhetoric on the exchange rate,” said Stephens.
He added that the RBNZ moved away from the key words “unjustified and unsustainable”, instead opting to to say “further depreciation is necessary”.
This statement is not as dovish as markets were prepared for, particularly concerning the exchange rate. The exchange rate has risen half a cent, and swap rates have risen five basis points.
“We don’t really agree with the OCR profile implied by that market reaction. There was nothing in this statement to cause us to alter our forecasts. We are not surprised that the RBNZ sees the need for further cuts. However, we are also unsurprised that the RBNZ has moved relatively cautiously at this one-page OCR review. We are braced for bolder articulation of the RBNZ’s plans at the full monetary policy statement in September, or in a speech in the week or two ahead,” said Stephens.
At the time of the last full monetary policy statement, the Reserve Bank expected average annual GDP growth of about three per cent for the next three years.
“We remain comfortable calling a two percent lowpoint in the OCR, with the odds favouring a 50bps reduction at some point, most likely September,” concluded Stephens.
Today’s statement did not include updated forecasts, but they will accompany the next full monetary policy statement.
