RBNZ Cuts Rate 25 Basis Points

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.

via Stuff.co.nz

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza