New Zealand: Reserve Bank of New Zealand lowers interest rates, signals further cuts in near future
March 10, 2016
The Reserve bank of New Zealand (RBNZ) decided to cut the official cash rate by 25 basis points to 2.25% at its 10 March monetary policy meeting. The decision was in accordance with the guidance the Bank announced in January that it could ease the monetary policy rate to make sure that inflation returns to its target range of 1.0% to 3.0%. Inflation fell to a multi-year low of 0.1% in Q4 2015 from 0.4% in Q3. The Bank also signaled that there is likely to be another interest-rate cut in the coming months.
In its statement, the RBNZ cited two specific factors that were behind its decision: weaker global economic growth and a drop in inflation and inflation expectations. Regarding the global economic environment, the Bank stated that risks to the global outlook are tilted to the downside in the wake of the slowdown in emerging economies, particularly in China. In addition, the Bank emphasized that despite the fact that extraordinary accommodative monetary policy measures have been taken in key developed economies, financial market volatility has increased substantially, while commodities prices remain low.
Regarding the domestic situation, the Bank mentioned that the agricultural sector in New Zealand, in particular the dairy sector, continues to face a challenging scenario against a backdrop of low commodities prices. Nonetheless, the Bank recognized that domestic demand should remain strong this year, backed by strong inward migration, tourism, healthy activity in the construction sector and accommodative monetary policy. Regarding the evolution of consumer prices, the RBNZ pointed out that inflation remains low due to low prices for fuels and other imports and that inflation expectations are showing signs of declining, which, according to the Bank, “is a concern because it increases the risk that the decline in expectations becomes self-fulfilling and subdues future inflation outcomes.”
The Central Bank noted that inflation is expected to rise over the course of 2016, but recognized that it will take longer to reach the target range of 1%–3%. Moreover, the Bank pointed out that the monetary policy will continue to be accommodative in order to bring inflation near the middle of the target range. The next monetary policy meeting is scheduled for 28 April.
Author: Ricardo Aceves, Senior Economist