New Zealand: RBNZ cuts the policy rate by 50 basis points to an all-time low in surprise move
August 7, 2019
On 7 August, the Reserve Bank of New Zealand (RBNZ) surprised market analysts by slashing the official cash rate (OCR) by 50 basis points to an all-time low of 1.00%. The move caused the New Zealand dollar to plunge sharply, as the market had priced in a 25-basis-point reduction. The Bank also indicated the possibility of taking more radical action ahead amid weak demand conditions and a subdued inflationary environment.
Below-target inflation, persistent weakness in the housing market, and rising headwinds to growth amid an increasingly tense global trade backdrop prompted the Bank to cut rates more than had been expected. The Bank noted that, in the absence of additional monetary stimulus, employment and inflation would likely soften relative to its targets, expressing increased concerns over the impact of cooling global economic activity on New Zealand’s export performance, investment and overall growth. In a press conference following the meeting, RBNZ Governor Adrian Orr even entertained the prospect of taking rates below zero, with the balance of risks to achieving the inflation and employment targets tilted to the downside.
In its forward-looking guidance, the RBNZ signaled the possibility of further cuts. Fears over the fallout of the intensifying U.S.–China trade dispute, cooling global growth and the dovish stance of major central banks could prompt the RBNZ to continue loosening its stance at its next meeting.
The next monetary policy meeting is scheduled for 25 September.
Author: Nihad Ahmed, Economist