New Zealand: Central Bank cuts rates more than expected to offset earthquake impact
March 10, 2011
At its latest policy meeting on 10 March, the Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) by 50 basis points to 2.50%, in a decision that surprised private sector analysts who saw the Bank reducing the OCR by only 25 basis points. The move represented the first rate cut in almost two years and followed on four consecutive months during which the Bank left interest rates unchanged. The RBNZ held the OCR at a record low 2.50% from April 2009 to June 2010 as a result of the economic meltdown in 2009. In its statement, Reserve Bank Governor Alan Bollard claimed the decision was a pre-emptive measure in order to lessen the economic impact of the earthquake that hit Christchurch on 22 February. Monetary officials acknowledged that the tremor caused substantial damage to property and immense disruption to business activity. Accordingly, authorities anticipate that economic activity will be negatively impacted not only in Christchurch, but also nationwide. Furthermore, the Reserve Bank stated that ?even before the earthquake, GDP growth was much weaker than expected through the second half of 2010? and that recovery signs witnessed in the first part of this year ?have been more than offset by the Christchurch earthquake.? Moreover, the Bank stated that the current policy accommodation will be removed once the rebuilding phase materialises, which is expected to take some time. The next monetary policy meeting is scheduled for 28 April. The Central Bank currently has an inflation target of 2% (1 percentage points). In its March monetary policy statement, monetary officials anticipate inflation to rise to 4.4% in the fiscal year 2011 (ending in March 2012) and 2.1% in fiscal 2012.
Author: Ricardo Aceves, Senior Economist