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RBNZ cuts interest rates again

RBNZ cuts interest rates again

(10 September 2015 – New Zealand) Reserve Bank of New Zealand lowered interest rates for the third consecutive time and signalled another cut may be needed to boost inflation as growth slows.

“At this stage, some further easing in the OCR seems likely,” Reserve Bank Governor Graeme Wheeler said after cutting the official cash rate a quarter percentage point to 2.75 percent.

“This will depend on the emerging flow of economic data.”

Wheeler is responding to new forecasts from the central bank that show growth in the 12 months to March will be the weakest in three years amid a slump in dairy prices and dwindling demand, while inflation is projected to hold below his 2 percent target midpoint for a fifth straight year.

“The next cut in interest rates will be in October,” Stephen Toplis, head of research at Bank of New Zealand in Wellington, said in a note.

“There is no need to wait unless data surprises to the strong inflationary side.”

“Further depreciation is appropriate given the sharpness of the decline in New Zealand’s export commodity prices,” Wheeler said.

The RBNZ today forecast that the 90-day bank bill yield will fall to 2.6 percent by the third quarter of 2016, 50 basis points lower than its previous projections in June. The outlook is seen as a guide to the direction of the cash rate.

“Our forecast track has 50 basis points of interest rate reductions built in,” Wheeler said. “We’re taking 25 basis points of that adjustment today.”

In its statement, the central bank indicated that if global economic conditions weakened further than it currently expected then it could reduce the cash rate by another 50 basis points to 2 percent. Wheeler said New Zealand is well positioned with a cash rate at 2.75 percent and the government’s budget near balance.

“In terms of monetary and fiscal stimulus, if it is needed, there’s plenty left in the tank,” he said.

Gross domestic product will expand 2.2 percent in the first quarter of 2016 from a year earlier, the RBNZ forecast. That’s less than the 3.3 percent predicted in June. Annual growth will recover to 2.8 percent in the first quarter of 2017, it said.

“The economy is adjusting to the sharp decline in export prices,” said Wheeler. “Activity has also slowed due to the plateauing of construction activity in Canterbury, and a weakening in business and consumer confidence.”

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