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Category: Money and Monetary Policy / Currency

Weak growth outlook prompts shock NZ rate cut

Thursday, 10 Mar 2016 05:40:09 | Rebecca Hyam

The New Zealand dollar has fallen around 2 per cent against its trans-Tasman counterpart since the rate cut. (Supplied: nzraw.co.nz)

New Zealand's Reserve Bank has made a surprise cut of 25 basis points to the country's cash rate, taking it to a record low of 2.25 per cent.

In a statement, the central bank said that the outlook for the global economy had deteriorated since December, due to weaker growth in China and slower growth in Europe.

Economists had broadly expected New Zealand's cash rate to be left on hold this month.

The unexpected move prompted a 1 per cent fall in the New Zealand dollar to 66.43 US cents.

In the central bank's statement, the RBNZ's governor Graeme Wheeler said New Zealand's dairy industry faced "difficult challenges", but "domestic growth is expected to be supported by strong inward migration, tourism, a pipeline of construction activity and accommodative monetary policy".

He identified the main threats to New Zealand's economy as "weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration, and pressures in the housing market".

Graeme Wheeler also planted the seeds for more interest rate cuts, saying "further policy easing may be required to ensure that future average inflation settles near the middle of the target range".

Official interest rates in New Zealand have been volatile in the last few years.

In March 2014, New Zealand became only the second developed economy to increase rates since the global financial crisis, after Australia did so in late 2009.

The RBNZ implemented three further rate rises, taking the cash rate from 2.5 to 3.5 per cent within a period of just five months.

Those rises were unwound last year, with the RBNZ cutting the cash rate in June, July, September and December.

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