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Bank of New Zealand

New Zealand's Reserve Bank cuts cash rate, signals more to come

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New Zealand's central bank cut its benchmark interest rate by 25 basis points to a record low 2.0 percent on Thursday and indicated at least one more rate cut would be needed.

Of 28 economists polled by Reuters, 27 had expected the Reserve Bank of New Zealand (RBNZ) to cut the rate by 25 basis points and one had tipped the central bank to remain on hold.

"Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range," Reserve Bank Governor Graeme Wheeler said in a statement.

The central bank is mandated with keeping annual inflation at between 1 percent and 3 percent. It is currently running at 0.4 percent.

The central bank's forecasts, reflected in its 90-day bank bill rates, underscore another rate cut is on the horizon. The bank forecast a 90-day bank bill rate of 1.8 percent by June 2017, down from a prior forecast of 2.1 percent.

Wheeler underscored that the high exchange rate was making it difficult for the central bank to meet its inflation objective.

"A decline in the exchange rate is needed," he said.

Why the RBNZ delivered another rate cut

The New Zealand dollar rose on the statement and was trading at 0.7292.

Westpac Bank Senior Markets Strategist Imre Speizer said the statement was dovish, with a very strong easing bias. However, the Kiwi jumped "because FX markets got really feverish and expected something beyond what was priced in."

Economists are tipping at least one more rate cut.

"We continue to expect the RBNZ to cut once further, in November, when the RBNZ has received the next set of key economic data and comprehensively redone its forecasts," said ASB Chief Economist Nick Tuffley.

Weaker-than-expected data or persistent NZD strength could bring easing forward to September, said Tuffley.

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