New Zealand cuts interest rate to record low on slowing growth

May 8, 2019: New Zealand's central bank cut interest rates to a record low Wednesday, the first reduction in two-and-a-half years as policymakers look to provide support in the face of slowing economic growth.

The move comes as central banks around the world take a more dovish stance on monetary policy as the global economy stutters and the China-US trade war rumbles along.

The Reserve Bank of New Zealand reduced the official cash rate to 1.5 percent from 1.75 percent, where it has been since November 2016, and just months after saying it expected it to keep them on hold until 2021.

“The (bank) decided a lower OCR (Official Cash Rate) is necessary to support the outlook for employment and inflation consistent with its policy remit,” governor Adrian Orr said.

The New Zealand dollar dropped half a US cent to 65.55 US cents on the announcement, with analysts tipping another rate cut before the end of the year.

“As unemployment rises and growth remains subdued in the second half of the year, we think the bank will cut rates to 1.25 percent in November,” Capital Economics economist Ben Udy said.

Westpac Bank head of New Zealand strategy Imre Speizer described the move as a “dovish surprise” and said the central bank had left the door open for more cuts.

Economic growth had slipped below 3.0 percent in 2018, with primary industries accounting for much of the drop.

Orr said the outlook for employment growth was subdued, with unemployment currently sitting at 4.2 percent, and inflation was expected to rise slowly from 1.5 percent in the year to March.

“Given this employment and inflation outlook, a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates,” he said.

He cited an uncertain global outlook, poor business sentiment and “softness” in the housing market as some of the reasons behind the decision.

The lower global growth, particularly in major trading partners such as China and Australia, prompted the bank to take action.

The decision was the first taken by the bank's seven-person Monetary Policy Committee, with the governor previously solely responsible for setting the base rate.


Posted on: 2019-05-08T12:05:00+05:00