The Reserve Bank has cut the official cash rate (OCR) to 2.5 per cent, and signalled that the cost of borrowing could fall even further.
But the central bank also fired a warning shot at households, saying that if spending picks up on the back of rising house prices, it may force up the cost of mortgages.
On Thursday Reserve Bank Governor Graeme Wheeler lowered the benchmark interest rate, which strongly influences the interest rates on deposit and mortgages, by 25 basis points.
Economic growth had slowed in 2015, the bank said, while record net migration was helping boost unemployment as job creation slowed.
Although the economy was expected to pick up in 2016, a recent rise in the kiwi dollar was “unhelpful” to sustainable growth, Wheeler said.
With inflation below the 1-3 per cent range the Reserve Bank is meant to target, the bank cut interest rates in a bid to drive the kiwi dollar lower and stimulate spending through cheaper borrowing costs.
The OCR has never been lower than 2.5 per cent, but Wheeler gave the strongest indication yet that if necessary he would drop it further if inflation failed to pick up.
A media statement said that inflation was expected to rise in 2016, and monetary policy would be used to support getting the consumer price index up to around 2 per cent.
“We expect to achieve this at current interest rate settings, although the bank will reduce rates if circumstances warrant.”
Economists at Westpac and ASB are forecasting that Wheeler will drop the OCR to 2 per cent in late 2016, while BNZ and ANZ have said 2.5 per cent would be the low point in the current cycle.
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