Interest Rates

NZ central bank cuts rates, sending currency lower

The Reserve Bank of New Zealand named a new central bank governor on Monday, Dec 11.
Brent Lewin | Bloomberg | Getty Images

New Zealand's central bank cut its benchmark interest rate on Thursday and signaled it may ease further as the economy softens amidst a sharp fall in export prices and a slowdown in earthquake reconstruction activity in Christchurch.

The Reserve Bank of New Zealand (RBNZ) cut its official cash rate (OCR) by 25 basis points to 2.75 percent as widely expected, delivering its third cut in as many policy reviews.

"Some further easing in the OCR seems likely. This will depend on the emerging flow of economic data," RBNZ governor Graeme Wheeler said in a statement.

All 13 economists polled by Reuters had expected Thursday's cut, and some anticipate another cut before the end of the year.

"There is probably two main messages: that while further easing is likely they're keeping their options open in terms of timing," said Su-Lin Ong, Senior Economist at RBC Capital Markets.

"The second thing is they gave a very clear green light for further weakness in the currency."

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The New Zealand dollar tumbled more than a full U.S. cent to a low around $0.6275, heading towards the six-and-a-half-year low around $0.6200 it hit last week.

Growth expectations, rate forecasts cut

The RBNZ lowered its 90-bank bill forecast to reflect the possibility of an additional rate cut in the coming months, while also downgrading its forecasts for GDP growth and inflation, citing weakening activity across the economy.

The RBNZ said the economy was adjusting to the recent sharp fall in export commodity prices, slowing earthquake reconstruction activity in the second-largest city, Christchurch, and weakening business and consumer confidence.

The resulting fall in the New Zealand dollar was helping to support some growth, the bank added, saying a further fall was needed in response to lower prices for commodities, particularly dairy products, the country's biggest export earner.

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The central bank's latest move comes as the RBNZ has been unwinding last year's monetary tightening cycle after lifting the official benchmark rate by a total of 100 basis points to 3.5 percent.

On top of a slowdown at home, volatility in the economy of top trading partner, China, has cut demand for dairy products, New Zealand's biggest export earner.

Although global dairy prices had rose 10.9 percent this month they have plummeted this year, hitting a 12 1/2 year low in August.

The steep fall has since cut the terms of trade and slashed incomes in the dairy industry, which accounts for roughly 7 percent of the overall economy.

Tumbling dairy prices have sapped confidence in the agriculture sector, with New Zealand business sentiment falling to a six-year low in August.