Central Banks

New Zealand central bank cuts rates, but kiwi dollar climbs

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 to match a record low of 2.50 percent and virtually shut the door on further easing, saying it expected to achieve its inflation target without more monetary stimulus.

The jumped on the less dovish statement by Reserve Bank of New Zealand Governor Graeme Wheeler, who trimmed the Official Cash Rate by 25 basis points as expected, having left rates on hold at the previous meeting after three cuts.

The RBNZ is projecting annual inflation will rise back into its 1 to 3 percent range in the first quarter of 2016 and "we expect to achieve this at current interest rate settings, although the bank will reduce rates if circumstances warrant," Wheeler said.

The kiwi recovered from an initial dip to rise above $0.67.

"We thought 2.5 percent would be the bottom for rates and that's what the RBNZ is saying - which is why the kiwi jumped afterwards," said Michael Turner, Strategist, RBC Capital Markets.

DCANZ: Dairy prices to rise in 2016
DCANZ: Dairy prices to rise in 2016

Wheeler's comments were supported by the central bank's relatively flat 90-day bank bill forecasts. The majority of economists see rates holding steady at 2.5 percent until the first quarter of 2017.

First NZ Capital Economist Chris Green said Wheeler's statement places a high hurdle for more rate cuts.

Still, "the risks distribution around this forecast is very much skewed towards an additional easing, particularly if the global or domestic environment were to deteriorate sharply from here," said Green.

More easing possible

Some economists, including ASB Bank Senior Economist Jane Turner, believe the RBNZ's current economic forecasts will not eventuate, in particular on the inflation front.

"Our view is the circumstances will warrant further OCR cuts in June and August next year to 2 percent. We are firmly of the view inflation pressures will not prove to be as strong as the RBNZ currently estimates," said Turner.

New Zealand's economy has been struggling this year with falling global dairy prices and volatility in China, its largest trading partner.

Is the kiwi rally getting overripe?

This prompted the bank to start unwinding interest rates in June, after raising them to 3.50 percent the previous year at a time when New Zealand was dubbed the world's "rock-star" economy.

Even amidst recent threats to exports, New Zealand has seen strong gains in tourism and immigration, which have strengthened its service sector.

An auction earlier this month showed dairy prices were beginning to stabilise, though analysts warned that they were still volatile and any recovery was likely to be slow.

RBNZ's Wheeler highlighted several risks to the economy including high net immigration, a possible drought associated with El Nino and further falls in export prices.

"We have interest rates at 2.5 percent, which compared to the U.S. and Europe, is still a buffer. We have room to cut if we need to."

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