New Zealand Monetary Policy November 2016

New Zealand

New Zealand: Official Cash Rate cut to lowest level on record, suggests end of easing cycle

November 10, 2016

At its final meeting of the year held on 10 November, the Reserve Bank of New Zealand (RBNZ) decided to lower the Official Cash Rate (OCR) from 2.00% to a record low of 1.75%. The cut, widely expected by market analysts, aims to bring inflation closer to the middle of the 1.0%-3.0% target range against a backdrop of heightened economic uncertainty and low commodity prices.

In its accompanying statement, the Reserve Bank said that the global conditions remain weak. Significant spare capacity and still-low prices for commodities are putting a lid on domestic inflation. In turn, low global inflation is suppressing prices for New Zealand imports. The Bank pointed out that increased political uncertainty abroad and growing skepticism about global integration and the impact it could have on “global trade flows and global output” were downside risks to economic growth.

The RBNZ said that the New Zealand economy is expanding at a solid pace. An accommodative monetary policy, strong population growth and strength in the construction, tourism and service sectors are supporting strong growth. Quarterly economic growth in the last two quarters of the year is expected to remain steady.

Assessing the latest inflationary developments, the Bank said that inflation in Q3 remains weak and below the target range. Lower prices for fuel and cuts in Accident Compensation Corporation (ACC) levies exerted downward pressure on prices in the third quarter of the year (Q2: 0.4% quarter-on-quarter; Q3: 0.3% qoq). The Bank foresees that the current easing cycle by the Bank should exert upward price pressure and result in higher inflation in the final quarter of the year. Nevertheless, the current easing stance has resulted in a strengthening of the New Zealand dollar and hinders the Central Bank’s attempts to raise inflation.

Going forward, the Bank said that “monetary policy continue will to be accommodative”. The Bank is confident that today’s rate cut should support strong economic growth and bring inflation to near the middle of the target range, suggesting that the easing cycle is over. However, the Bank said that monetary “policy may need to adjust” to growing uncertainty, particularly from abroad.

The next meeting will be held on 9 February 2017.

FocusEconomics panelists expect that the OCR will end 2016 at 1.75%. For 2017, participants see the interest rate ending the year at 1.67%.


Author: Jean-Philippe Pourcelot, Economist

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New Zealand Monetary Policy Chart


New Zealand Monetary Policy November 2016

Note: Official Cash Rate (OCR) in %.
Source: Reserve Bank of New Zealand.


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